Condor Options

Steven Sears in this weekend’s Striking Price is still on board the “Keep the VIX in perspective” train:

Stop obsessing about the VIX. The Chicago Board Options Exchange’s Market Volatility Index (VIX) is many things, just not all things. It can rise or fall for reasons that have more to do with trading type than market direction. During the week, some investors sold short-term hedges and bought long-term hedges. This exacerbated the VIX’s recent lows, and is one reason why the SPX skew — essentially the difference between put and call implied volatility — edged higher in thinly traded options that expire toward year’s end. [link]

We in the blogosphere covered this ground last week, and the general sentiment about not over-interpreting individual data points should only become more salient as we move into the summer months. There is some significant government data coming out this week, but earnings reports are drying up and this looks as good a week as any for the annual summer blandness to begin. It’s always fun to catch the Bubblevision staff pacing around the NSYE floor, dodging tumbleweed and wondering how many different ways they can rehash old stories.

We’re developing a market sentiment indicator that is testing pretty well so far and should prove helpful in checking our own biases from week to week. It isn’t ready for prime time yet, but the reading for this week is pretty close to neutral. We wouldn’t be surprised to see markets work off their short term oversold status by way of time rather than price - meaning that we could churn sideways here before resuming the selling or, by some miracle, finding new bullish leadership.

Now, to contravene our own injunction, let’s obsess just a little more. As of this morning, the short term volatility indexes (VIX, VXN, RVX, VXD) are all up 4-5%, and the VIX is teasing us with a move toward the broken trendline on the 2 year weekly chart. Markets are quietly and slightly up this morning, so this may well be institutions firming up their hedges in case oversold conditions persist this week. We suggest individual traders do the same.