VIX Graph February 26, 2010


There's not much to say about the data.  Market implied volatility is falling steadily – and once again VIX is below 20.

That level is not undeserved because realized market volatility is low and has been low.  Every sell off is met with buyers and the market moves slowly but steadily higher.

That's the market scenario that brings complacency, which in turn brings out more option sellers than buyers.  IV shrinkage can continue for quite awhile.  Just look at the left of the chart.  Three years ago VIX reached a level that was (barely) less than 10.

To me, the economic outlook is poor and middle-America is not going to do well.  However (as I read somewhere, but do not remember where), Congress seems to be on the path of continuing to protect the banks and Wall Street.  If that's true, then we may see something unusual continue: a society being slowly eaten alive by the banking vultures.  Translation:  more unemployment, more misery, more poverty and more profits on Wall St.

I'm perplexed, but outside of owning protection against a disaster, am unwilling to place any significant wager on the downside.


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6 Responses to VIX Graph February 26, 2010

  1. Andy 02/27/2010 at 3:22 AM #

    It’s informative to hear your candid, albeit infrequent, opinion on the state of the market. My sentiments are in line with your summary and I feel this will be a flat, if not down year (once people realize that mostly the wrong people are benefiting from government stimulus). I recently read an article that made a frightening analogy between our economic state and the fall of the roman empire… a tad extreme, for certain.
    I was wondering why VIX spikes are correlated with market drops and not rallies… is it simply because the majority of options are bought as protection against market collapse? Shouldn’t options trading be just as brisk during rallies or any other periods of high volume, where investors may use options for speculation, or to protect profits made, etc?

  2. Mark Wolfinger 02/27/2010 at 9:07 AM #

    Panic and greed are different. They bring out different characteristics in investors.
    More on this in a full post.

  3. Ashish 03/01/2010 at 7:35 AM #

    Mark, I have three questions:
    How do I know which call and put the pros are buying?
    Also I am thinking about subscribing to Morningstar’s premium membership.
    Will it be help full in buying options?
    If not, what else should I subscribe to find profitable calls/puts?
    Thanks, Ashish

  4. Mark Wolfinger 03/01/2010 at 8:32 AM #

    1) You cannot know.
    Who are the pros? Do you mean the market makers or the professional money managers?
    The market makers buy whichever options are being sold. They don’t go out and pick and choose like you do.
    Few professional money manager buy options. In my opinion, buying options is not the path to earning profits.
    2) Save your money. To use their service (or any other), I would require PROOF of a winning track record going back at least three years.
    3) Subscribe to your brain. That’s the only possible place to find winning trades. If you cannot figure out which options to buy, congratulations – you have come to a wise conclusion – then don’t buy options. Recognize that buying options is a suckers game – one that only a small minority can do successfully.
    In my opinion, anyone who can make money by picking good trades would NEVER sell that information. They would trade their ideas and keep the large profits. To me, the fact that anyone offers to sell ‘picks’ is proof that they cannot make money by trading – so they make money from the suckers who buy their picks.
    This is not quite the same as hiring someone to manage your trades and make all decisions for you. I don’t recommend that either, but at least you get a full package: buy, adjust, sell advice all packed together. With no time lost in sending messages for you to adjust or exit positions. They make the trades for you.

  5. ted 03/12/2010 at 6:52 AM #

    Doesn’t intelligent option buying come down to reading the chart correctly and then using a call or put buy to mirror a stock trade, thereby tying up a fraction of the monies required for a swing trade with the actual stock?
    The option buyer must get a high delta and use the same exit strategies that one would use on a stock– a profit target and stop loss tied to the underlying.

  6. Mark Wolfinger 03/12/2010 at 7:21 AM #

    Hi Ted,
    Yes. That’s all that it takes. Reading the chart correctly.
    And getting the timing right, because options are a wasting asset. This is minimized by choosing the high delta option you mentioned.
    The fact that the vast majority of individual investors cannot beat the market averages, and
    The fact that the majority of professional money managers cannot beat the market averages,
    tells me that ‘reading the chart correctly’ is beyond the ability of traders/investor/pros.
    If you can do it, more power to you! I cannot.