Monday, July 6, 2009

Is the VIX actionable?

140 dead and 816 injured in riots in China, and that's according to Government statistics. Does anybody buy that? (At first, the official reports were 3 people dead. ) That story is like the VIX here. It has collapsed, because people have been selling calls on the S&P (who hasn't), even though some people are hedging and buying protection.

July 6 (Bloomberg) -- The biggest drop in U.S. options prices since 1998 masks growing anxiety over the stock market’s rebound, as traders pay more for bearish contracts than any time since before the failure of Lehman Brothers Holdings Inc.

Investors are spending the most since August 2008 to protect against a 10 percent decline in the Standard & Poor’s 500 Index versus wagers on an advance, according to data compiled by Bloomberg. That’s one month prior to New York-based Lehman’s bankruptcy. The premium on so-called put contracts increased even after the Chicago Board Options Exchange Volatility Index, a gauge of U.S. options prices known as the VIX, fell 40 percent last quarter.

Since that story was in Bloomberg, a team of eagle eyes at Citigroup noticed it:

“The reassessment of the global economic outlook is likely to continue this week,” a team of Citigroup Inc. strategists, including Todd Elmer in New York, wrote in a research report today. “As a result, an extension of the recent bout of risk aversion may lie in store.”

I wonder what Dennis Kneale's take will be. We await breathlessly.

But if you really want to understand the VIX, just go here, because these two are just kissing cousins.

And they appear to have the same relevancy as indicators that are "actionable."

Maybe because you have the same players involved.


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