Friday, June 15, 2007

No Grunting, Please

Yesterday I spelled out my position on the unlikely return of a sub-10 VIX. Of course, the first thing I noticed when the markets opened today was that the VIX had fallen another 1.06 points to 12.58, meaning that a single digit VIX was suddenly not looking like a fanciful idea. I haven’t changed my opinion about the VIX trading in the 12.50 – 15.00 range, but I must confess to elevating an eyebrow for some of the morning’s action.

Frankly, I never anticipated that my drop shot back over the net to the Daily Options Report would be returned, but the fleet afoot Adam Warner pounced before you could say “VIX implosion” and detailed his thinking about how gravity might swallow the VIX whole during the next options cycle.

I recommend that you get the benefit of his thinking in its entirety, but for those who are on a strict mouse click quota, I have highlighted some of the salient points:

“Let's consider July options. They have 35 days until expiration. But I would strongly suggest this is not a typical 35 day stretch. Summer is slower to begin with, and have a holiday smack in the middle of this cycle. On a Wednesday no less, which invariably leads to an incredibly dull week.

If you net-buy options of any sort, you are buying time and the typical market action that the price implies. But you are not getting full time value here, rather something les than 35 days worth of fluctuation.

So as such, buyers are going to lower their bids.

Likewise sellers know they have less risk than in 35 normal days. Barring an *event*, there is a ton of dead time coming up. So they can offer cheaper.

Now back to the volatility calculation. It picks up NONE of this. As the price of an option gets cheaper and everything else stays the same (most notably time until expiration), it will spit out a lower volatility.

And to me we have a perfect storm brewing. The early parts of an expiration cycle generally produce lower volatility anyway as buy writes get rolled. Then comes the holiday, and not just a long weekend but a week long siesta.

Throw in the fact that summer is starting, and options are already on the high side relative to actual stock volatility and it just feels VERY vulnerable to a VIX crush.”

Mind you, I would hope that readers will not let their own feelings about whether Maria Sharapova or Ana Ivanovic is the better tennis player or more pixel-worthy influence your thinking about the VIX, but if teenage boys start flocking to this site to brush up on their market timing skills, at least I know that I will have contributed to the betterment of humanity in some small way.


JakeGint said...

...those who are on a strict mouse click quota...


Thanks for the insight.

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