Wednesday, August 8, 2007

Two Interesting Perspectives on the VIX

In my scramble to get caught up with what others have been saying about the markets, two VIX-related posts in particular have captured my attention.

It should come as no surprised that one of them comes from Bernie Schaeffer, a regular in this space, whose "Examining Sentiment in the Context of a Market Pullback" concludes:

"Pullbacks to support levels in a bull market when accompanied by climactic fear levels are almost always buying opportunities, and this diagnosis applies today. This does not necessarily mean today was the bottom, but it does strongly imply that it would be foolish to exit this market in response to the gloom and doom headlines."
I was also interested to see what Mark Longo, a long time contributor to Trader's Magazine, thinks of the VIX in the context of the current market. Writing for The Options Insider, Longo provides some interesting historical context for the VIX and wonders aloud if we are entering a new era of continued high volatility. Looking at some of the VIX options action, he points out that "the so-called 'smart money' is betting that the current volatility trend will continue, at least in the near-term." Siding with the smart money crowd, Longo concludes:
"...with oil and credit concerns looming on the horizon, it certainly appears as though the VIX may have finally awakened from its long slumber."
These are two perspectives are recommended reading, along with those of a dozen VIX-fluent bloggers: well as others I'm sure I have accidentally overlooked.


Anonymous said...

You biased now as you are long so you try to look for sources that support your point
Although you're wrong here. Financial markets are in deep trouble now
Central banks don't understand what to do and outcome to the current crisis is not clear

Bill Luby said...


A couple of comments:
1. Yes I am net long the markets and short volatility, but I certainly welcome all points of view
2. There are not many perspectives on the VIX in writing out there at the moment, but if someone puts together a cogent argument about why the VIX should be in the 30s or starts buying Sept 35 calls in bulk, I'll mention it as soon as I see it
3. I agree that there could be more cockroaches and bigger ones at that which could damage not only the markets, but some of the key underlying institutions...yet I think the VIX reflects a greater fear than sum of the probabilities applied to the various possible outcomes
4. No LCTM-type bailout appears to be needed at this stage
5. The market overshot to the downside some 14 months ago and I think the same thing is happening again
6. I'll be a lot more worried if/when the XBD breaks below 208

Cheers and good trading,


Bill Luby said...

If you want the "this is worse than LTCM" perspective try Nouriel Roubini's Worse than LTCM: Not Just a Liquidity Crisis; Rather a Credit Crisis and Crunch

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