Roubini and the VIX

Call me crazy, but lately I have been pondering the sudden disappearance of Nouriel Roubini from the media scene. You could probably add the likes of Meredith Whitney and others to the list of media sensations who rose to fame as a result of successful predictions about the financial crisis and have now been displaced by a different set of pundits who are talking about subjects like green shoots, TARP repayment, and the coming upturn in jobs and housing.

While Roubini’s media star may be setting, the man himself is not slowing down – nor is he backing away from his bearish leaning. Today Roubini is out with Latvia’s Currency Crisis Is a Rerun of Argentina’s and earlier in the week the issue was Green Shoots or Yellow Weeds?

So as I watch the S&P 500 index move above 950, I am thinking about complacency and the possibility of a ‘rebound bubble’ of sorts.

I checked with Google Trends to see what has happened to interest in Roubini and I was not surprised at all to see a chart that resembled that of the VIX. In fact, when I combined the Roubini Google Trends results with the VIX in the graphic below, I was interested to see that interest in Roubini seemed to be a leading indicator of sorts with respect to volatility.

Of course volatility looks as if it may have a stake driven through its heart today, but I am very skeptical that the VIX will be able to drop much below the current 27 level for at least the remainder of the month.

[graphic: VIXandMore]

Disclosure: Long VIX at time of writing.

VIX Options as Catastrophe Insurance

As I type this, Congress is still debating the Troubled Asset Relief Plan (TARP) and various modifications and alternatives that have sprung up over the course of the past week.

While the outcome is uncertain, there is clearly a broad recognition that even a flawed plan announced before the markets close today may be better than the possibility of the panic and chaos we could see in global financial markets on Monday if Congress is still trying to agree on a course of action.

If there is no agreement on a bailout by the end of the day, VIX options might be one potential source of catastrophe insurance for your portfolio. Before I go any further, let me quickly add that VIX options are such a strange and difficult to understand animal that SPY or SPX puts is probably a simpler and better way for most investors to find catastrophe insurance on the S&P 500 index.

With that caveat out of the way, consider that the VIX now at about 36. It is important to understand that VIX options are not priced off of the cash/spot VIX currently at 36, but rather are priced off of VIX futures. This is an important distinction, as VIX futures for the month of October are in the 28s, the Novembers are trading in the 26s, and the December futures are trading in the 25s. For anyone looking to trade October VIX options, the underlying to focus on is October VIX futures, which is why the October VIX 20 calls are currently quoted at 8.80 – 9.10.

The second important factor to consider is that VIX futures move in a much more sluggish fashion than the cash/spot VIX index. For some supporting graphics to better illustrate how futures move vs. the VIX, try VIX Futures and Recent Market Action and VIX Futures: The One Picture to Remember. A rule of thumb is that VIX front month options generally move about half as quickly as the VIX.

If any of these thoughts about VIX options are new to you, then this is not the time to take a flier on VIX options. On the other hand, if you have an understanding on how these products work, it might be a good time to think about the VIX as portfolio insurance.

Poll Result: Financial Crisis in Top of the 6th Inning

Thanks to all who participated in the first ever VIX and More poll, which asked readers, “What inning is it for the financial crisis?”

The results of the poll are shown at the right. The median response puts the crisis in the early part of the sixth inning; the mean response has it split between the fifth and sixth inning; and the most common response was the seventh inning.

The poll ran for one week and much to my surprise, opinions about where we are in the financial crisis did not change at all following Thursday’s rumors and Friday’s announcement concerning the Troubled Asset Relief Program or TARP.

For the record, I was pleasantly surprised by the strong response to the poll and will consider resurrecting this feature periodically in order to get a better sense of what the blog's readership is thinking about important issues.