Volatility Index Conundrum Solved ~ The Risk Averse Alert

Monday, December 12, 2011

Volatility Index Conundrum Solved

A brief remark on today's "surprising" VIX performance which appears a newly developing trend whose import projects imminent market weakness...


Essentially being a measure of options premium pricing, seeing the Volatility Index come in today while the market fell (as has been the general case this month, as well) is an oddity all the more strange given last week's hyperinflationary bailout fail in Europe. Yet this probably is simply a consequence of strong hands increasingly becoming options buyers, while weak hands, their sellers, scramble for what relatively few crumbs of capital are available.

So, how are strong hands positioned? The CBOE Put/Call Ratio suggests they're leaning short, yet still protecting long positions. This essentially has been this measure's message since August, remaining in an elevated trading range.

Yet just as strangely as $VIX came in today, so too did $CPC. Thus is my hypothesis confirmed, then, as strong hands are seen hedging short equity stakes with call options and, indeed, doing this more cheaply. Thus, the market's path of least resistance appears lower and stat.

Fast Money
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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.

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