Thursday, December 8, 2011

VIX Puts Looking Attractive

A lot can happen to the financial markets in the course of the next day or so and by my unofficial reckoning, quite a few of those are not just scary, but could have a 2008 flavor to them.

With the VIX at 30.60, implied volatility certainly is high, but not as high as it has been in recent months. This sounds like it may be a good time to buy some VIX calls, but I have a contrarian thought. VIX puts are relatively overlooked right now. The ask for the VIX Dec 27.50s is 1.00 and for the Dec 30s it is 2.30. Should we see a post-summit volatility crush, then even with some of those bearish scenarios, it is possible that the VIX will be declining as the anxiety over event volatility is behind us.

I like to say that the best time to buy VIX calls as portfolio protection is when the VIX is cheap, not when you think you need it. The corollary to this is that a good time to buy VIX puts is when everyone else is snapping up the calls at inflated prices.

Keep in mind that VIX options have their own options cycle. This month they expire on Wednesday the 21st and the last time they can be traded is on Tuesday the 20th.

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