Wednesday, December 19, 2007

No Fear?

We may be stuck in a holiday time warp, but I find the lack of fear in the VIX to be more than a little surprising, particularly given the spate of gloomy headlines. I talked about this same subject three weeks ago, but the gulf between the VIX action and the news flow has grown wider and wider ever since. Is it possible that this kid has already grown up enough to get a hedge fund job?

The ISEE (below the long-term mean for the 30th day in a row) and the CBOE equity put to call ratio (spiking once again) both indicate that call buying relative to put buying is considerably below historical norms, which makes the VIX numbers even more surprising.

In times like this I turn to the VIX:SDS ratio. As shown below, my proxy for the fear premium component of the VIX is now showing a reading that is substantially below the 10 and 100 day simple moving averages. Is this merely a case of desensitization or is something else going on?

12 comments:

Anonymous said...

M. Funds , everyone is running for cover,, tons of money is going into
comodities,,, wheat and the like..
You may have to tweek your toy.


Mac

Anonymous said...

Interesting, but, is there a way to pick up the number of dollars coming out of our market, and going overseas??



Mac

Anonymous said...

Does a spiking VIX always=put buyers only? Does option selling and call buying not affect the VIX by an equal amount?

Maybe Bernie was right about the inverse ETF's becoming more popular and liquid as a hedge. If those instruments compete with options--and their activity is NOT included in the Vix-- then perhaps it reduces the validity of the VIX??

Baffling.

Jeff Pietsch CFA, Esq said...

Maybe its just another symptom of this split market environment. One population of stocks is doing fairly well, while another suffers considerably. Broad market measure may confuse this underlying action. Additionally, there may be divergent views of the where we are at in the community.

Jeff Pietsch CFA, Esq said...

Ps - Is there an equal weighted version of SDS out there? May be a start in the right direction if the above hypothesis is correct.

Jeff Pietsch CFA, Esq said...

Pss - Could always make one synthetically using the SDS premia. Alright, I'm done....

Struggling said...

The values of calls and puts contribute to the level of the VIX contracts. Remember, it's the sellers of options that define the premium.

I believe Jeff is dead on, that some sectors are seeing declining volatility, which should continue as more become aware. I find Bill's link to the zerobeta blog highly insightful.

But there has only been two days of eratic VIX behavior.

Bill Luby said...

Thanks for the comments, everyone. Great stuff all around.

The only answer I have to all the questions posed is that there is not an equal weighted version of SDS (the equivalent of an inverse 2x of the RSP) that I am aware of.

As for everything else, it looks like we'll just have to wait and see.

One story I will definitely be watching closely is inverse ETFs as a substitute for a VIX hedge. I guess it's time to check on the QID options volume vs. VIX options volume.

Cheers and have fun with the tail end of options expiration week,

-Bill

randy said...

Whoa! Great pic and very timely of you. Looks like he certainly has a future at a hedge fund if he survives that long. If not, he'll be up for a Darwin award ;-)

Rob Hanna said...

Bill -

Love the blog. Keep up the good work.

I did a quick study last night looking at lackidaisical VXO action during sharp market declines that I though you might find interesting. I posted my results here:

http://www.themoneyblogs.com/hanna/my.blog/does-the-relatively-low-vxo-during-this-drop-mean-anything.html

If the format is coming out screwy you can email me at

rob@hannacapital.com

and I'll be happy to send you the spreadsheet.

Regards,
Rob

Bill Luby said...

An interesting study, Rob. Thanks for sharing it here.

Cheers,

-Bill

Charles Butler said...

Same thing, but from a different angle. Within the things I follow, alot of stocks that I think should be reacting to volatility, are not. What to call it? Complacent vol? It does it for me.

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