The Fear is Gone!
I've read some recent articles about how the VIX or volatility index on the S&P are now trading much lower than earlier in the year. Even with the market's recent reversal, the markets have traded mostly in an orderly fashion.
Here is one of those articles I read: http://blogs.wsj.com/marketbeat/2009/06/30/the-vix-how-low-will-it-go-and-should-you-buy-volatility/
The question is how to buy volatility? From what I can gather, the only way is to buy or sell options which generally trade cheaper when volatility is low. There must be a way to capture this via some spread by buying and selling a call or some other form of a paired trade. I cannot find any ETF that would make this trade easier.
One thing I have noticed during this period is that short term US treasuries (ETF representation SHY-NYSE) have sold off during this period of stability. There are a myriad reasons for the sell off in US treasuries of course, but the decrease in volatility is one of them. During last years sell off the $USD was king and so were treasuries as overbought as they were. This was a function of volatility and a flight to safety.
This is the one year chart of SHY-NYSE:
I cannot envision smooth sailing in the markets' near future. Already there have been recent calls to the SEC (by the bankers of course) to limit short selling of financial stocks again! What will be the next Black Swan event that will propel the VIX to new highs?
If you're looking for a place to park some cash until the next good investment theme comes along, I would suggest the $USD via SHY. This is short term only as I believe the $USD will be sacrificed long term to fight off any deflationary threats!
posted by Des @ 7/05/2009 11:52:00 AM
5 Comments:
SHY has very low beta; maybe too shy for me! (get the pun?!?!) I think you are looking for VXX:
http://finance.yahoo.com/q/pr?s=VXX
When you posted on July 5, it was a good call that the Vol would tick up above the downward channel it has been trading in for 3 months. Not sure if it's headed much higher from here.
This one about how the VIX and the market are negatively correlated, was interesting:
http://online.wsj.com/article/SB124779243160755275.html
Can you cut and paste the text? I don't have an account on WSJ.
The only time when both stocks and VIX are rising is when there is panic buying, usually after a sharp sell off.
Something unusual happened Wednesday during the big stock-market rally -- the CBOE Volatility Index, or VIX, actually rose nearly a full point.
While the Dow Jones Industrial Average, Standard & Poor's 500 and Nasdaq each surged about 3% or more, buoyed by some strong profit reports and the Federal Reserve Board's economic growth upgrade, the VIX moved up from 25.02 to 25.89.
This isn't supposed to happen. Normally, as investors pour money into stocks, volatility is expected to lessen, not increase. The two are negatively correlated, so this was a rarity for the "fear gauge," as the VIX is known.
In fact, Jason Goepfert of Sentimentrader.com said that Wednesday was only the third time in history that both the VIX and S&P 500 rose more than 2.5% on the same day. The other two occasions were Nov. 27, 2002, and a few weeks ago, on June 1.
"The market declined after both of those instances," he said. "Generally, when implied volatility increases on a day when stocks move strongly higher, it has led to below-average returns in the short term, and mostly in-line results after a couple of weeks."
Mr. Goepfert suggested the potential reason behind the move in the VIX was panic call-buying by those who had short-covered calls ahead of expiration this week.
Indeed, this demand for calls -- which convey the right to buy shares -- may have pushed option prices higher, leading to an increase in the VIX.
The VIX's behavior Wednesday may have been an anomaly, or the result of the vagaries of options-expiry transactions.
Or perhaps it means traditional concepts of stock-market relationships no longer exist, given how tremendously the investment landscape has been altered over the past 18 months.
Traditionally, a VIX below 30 meant the market was relatively stable while a VIX at 30 typically reflected a sense of panic or capitulation. Late last year, the VIX reached surreal figures way in excess of 30 but, of course, the stock market survived.
Granted, market volatility has been subsiding since those days of the Lehman collapse as confidence in an economic recovery has climbed.
Still, it will be interesting to see if there are more trading days like Wednesday -- a strange combination of optimism and fear.
The above comment is the cut and paste from the WSJ article. I had trouble finding it because it was linked via google finance yesterday and wasn't in the market news section today!
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