Unhedged Complacency ~ The Risk Averse Alert

Friday, December 17, 2010

Unhedged Complacency

The talk of the town today was the unusual decline in the Volatility Index on this options expiration Friday...


Well into this afternoon's trading the VIX was down more than 10%. Apparently those who are long equity find no compelling reason to roll their [put option] hedges forward. Thus, put option premiums came in substantially today.

Yet believing that, a calamitous market collapse looms, seeing a contrary consensus otherwise expressing its confidence in the market's prospects is a welcome sign. Dropping flood insurance at a time when any number of severe hurricanes hovering just off the coast could hit land at any moment hardly seems a prudent course of action. Then again, with a bunch of many times over bankrupt investment banks so consumed with maintaining appearances of solvency, there simply might not be enough excess capital available for the likes to afford adequate portfolio insurance.

Whatever the cause of today's unusually sharp pullback in the S&P 500's volatility index, it certainly can be seen fitting circumstance at a point very near the precipice from which the market's spectacular unraveling is thought set to commence.

Fast Money
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© The Risk Averse Alert — Advocating a patient, disciplined approach to stock market investing. Overriding objective is limiting financial risk. Minimizing investment capital loss is a priority.

Analysis centers on the stock market's path of least resistance. Long-term, this drives a simple strategy for safely investing a 401(k) for maximum profit. Intermediate-term, investing with stock index tracking-ETFs (both their long and short varieties) is advanced. Short-term, stock index options occasionally offer extraordinary profit opportunities when the stock market is moving along its projected path.

Nothing is set in stone. Nor is the stock market's path of least resistance always known. More often than not, there are no stock index option positions recommended.

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