Thursday, April 5, 2012

VIX Option Traders Are Selling Puts, VIX Cash Around 2-year Low (16.44)

VIX (stockcharts.com)
Today on the OptionMonster Volatility Sonar Report, Jamie Tyrrell, of Group One Trading, said traders were selling VIX puts yesterday and today. Watch the video below. It looks like the VIX, or volatility index, which uses S&P 500 option prices to measure forward looking (implied) expectations of market volatility, closed around the 2010 and 2011 lows today at 16.44. In 2010, the VIX bottomed at 15.23 and spiked to 48.20 during the flash crash, and in 2011, the VIX bottomed at 14.27 and spiked to 48 when Standard & Poor's downgraded the United States' credit rating. Last month (March 2012) the VIX hit a new low of 13.66.

The VIX is interesting because when the index is this low, it's all about timing the next eruption in volatility. The market can do nothing for months, like it did in the first half of 2011 ex-the earthquake/tsunami in Japan. But a low VIX can also mean, or present the idea, that volatility is cheap (S&P option premiums) to hedge against a fearful move in the S&P 500 index.

But now it gets confusing, because, according to the Volatility Sonar Report, VIX option premiums are currently expensive (VIX implied volatility is high), which is why traders are selling VIX puts to gain long exposure to VIX futures. Are VIX option premiums high because of the TVIX (VelocityShares Daily 2x VIX ST ETN) drama? It appears so. I found a post at FT Alphaville from 3/26/2012 with a Barclays note that said: "VIX implied volatilities continue to trade at a premium to our fair value probably due to recent increase in the AUM of leveraged VIX ETPs."




Here's a guest post on selling puts that you might find interesting: Two Ways To Gain Exposure To Financials With Less Risk (from 10/2011).

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