Monday, March 8, 2010

Fading Complacency

With the recent upsurge in equities, volatility as measured by the VIX (formally called the CBOE Volatility Index), has gotten utterly clobbered. With 21 day historical volatility of the SPX sitting at a measly 11%, it could certainly be argued that the heavy VIX is justified. After all, nobody like's buying options at 20% volatility on a stock that's only realizing 10%. In hindsight it's easy to see that the early Feb VIX super spike to 29 was overdone. Boy has that inflated volatility bubble fizzled fast. The important question at hand is whether or not the pendulum has swung too far in the other direction? Has excess fear turned into too much complacency? Well, it's fair to say the VIX is oversold by just about any measure (proximity to moving averages, overstretched date & range, etc...).

As is customary with this time in the expiration cycle where expiration be comin' round the mountain, let's see if there are any plays worth considering. While the cash VIX closed the day at 17.79, March VIX futures are a tad higher at 18.35. Remember, March VIX options are priced based off March Futures, not the cash. As such, the 18 strike put option is out-of-the money, not in-the-money. If we wanted to fade the complacency we may consider selling the 18 strike put for $.50. While it would be nice to receive more premium, with a mere 7 trading days remaining before expiration (VIX options last trading day is next Tuesday), it's tough to find much premium remaining.

[Source: MachTrader]

On the other hand, if you thought the VIX likely to continue its drop into the abyss, you may consider keeping it simple and buying an in-the-money put such as the March 19 or 20 strike.

For related posts, check out:
The VIX and Top Picking
VIX Options Laid to Rest While the Cash Springs to Life
Quick VIX Question

3 comments:

Mark Wolfinger said...

Hey Tyler,

I thought it is still the CBOE Volatility Index.

If you have updated info, I'm anxious to hear about it.

Best regards,

Tyler Craig said...

Good catch. I meant "formally".

Fixed.

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