So the Striking Price Daily picked up on the sluggish VIX yesterday. They’re several days late to the party, as all the key options bloggers have been talking about this for awhile, but then what can you expect from a traditional media outlet? Anyway, they get the basic story right, but what’s with Pete Najarian stating the obvious?

“I’d like to see a three on the front number of the VIX to signify that panic has set in,” says Najarian. “That has usually been a great indicator that investors are washed out, and that is often a good time to start looking at stocks.”

Yes, we’d all like to see a huge VIX spike to signal some kind of obvious capitulation or turning point. But we might not get that this time around, and the thought occurs to us that maybe people are relying too much on this one indicator to track sentiment and “fear”. You know what happens when people get afraid? They start selling. Heavy, sustained selling pushes stocks down, even (gasp) below their 200 DMAs. So hint: check the % of stocks that are below their 200 DMAs on any of the major indexes, and compare to prior market bottoms. Not quite as sexy an indicator as VIX chatter, but maybe a bit more reliable this time around.

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n+1 is always fun reading, but “Interview with a Hedge Fund Manager” finally gives us an excuse to plug them in this venue. Taste:

n+1: What’s a “ten-sigma event”?
HFM: Meaning that it’s ten standard deviations from the mean… meaning it’s basically impossible, you know? But it’s kind of a joke, because returns are very fat-tailed, so the joke that we always say is, “Oh my God, today I had a loss that’s a six sigma event! I mean that’s the first time that’s happened in three months!” It’s like a one in ten-thousand-year event, and I haven’t had one in the last three months.
n+1: So it happens all the time?
HFM: Those kind of things do happen, yeah.

Be warned: n+1 is a literary/intellectual/hipster Brooklyn thing, so if you’re not careful you might get some culture on your tie.

Yes, it’s time for our list of predictions for 2008.

Economy. GDP growth in the United States will slow to 1.5%, prompting an annoying number of articles on the decline of the US and lots of analogies to the Roman Empire. The Fed will bring discount rates all the way down to a futile 4.25%, in an attempt to put out an economic grease fire with a fiscal bottle of Evian. Which, as everyone knows, spells “naive” backwards. Oil will pull back a bit before rocketing to $120/barrel, and inflation will remain as “contained” as it is now - which just means we will continue to pay $5.00 for a half gallon of organic milk in Manhattan. Jobs will decline, unemployment will rise, the trade deficit will increase, and nothing in particular will be done about it, since we have an exceedingly lame-duck administration in office and it is an election year.

Politics. Obama will win the Democratic nomination, and will tap either Richardson or a current unknown as VP. Obama will be the next President. Huckabee will be enough of a thorn in the early primaries to cause: a) Bloomberg to enter as an “independent” (read: the wannabe establishment candidate) and b) Romney to get the nomination as the actual Republican establishment pours cash into his campaign out of sheer panic. One of the worst presidencies in US history will draw to a close, and our long national nightmare will almost be over.

[UPDATE 1/6/08] After watching the debate last night, and chatting with some friends over brunch today, I have to change my VP pick: it’s obvious that Edwards is auditioning for the job, and it seems much more likely that Obama will pick him over anyone else.  Edwards has everything to gain by taking this route, since his policies are more revolutionary than those of any of the other major candidates - he’s young enough that waiting 8 years for another shot at the title isn’t a big deal, plus as VP of the Obama administration, he’d be the default candidate.

Society: An alarming number of US citizens will continue to believe that the planet Earth was created in 6 days, and science literacy in general will only get worse. True literacy - the sort that excludes instant messaging, Twitter, Facebook, Time magazine, and any media owned by Rupert Murdoch - will also decline. Public health will improve slightly as insurance companies and HMOs slightly expand benefits in order to stave off the inevitable and much-deserved onslaught coming their way in 2009. Soccer (”Football”) will not gain any increased popularity or market share in the US, despite the presence of David Beckham. Celebrity gossip will continue to substitute for actual news coverage in the corporate-owned media. ClearChannel and the RIAA will continue to be their own worst enemies. The writers strike in Hollywood will have an interesting impact on the film industry.

Trading: Almost forgot! Volatility will stay in the 20-25 range for most of the year. The next bear market will get off to a fantastic start, and long stock traders will have no place to hide - well, except for those ultrashort ETFs. All those Chinese grandmothers who used their life savings to open stock accounts on the Shenzhen and Shanghai exchanges will squint jealously at our ability to short stock and trade options. Retail investors will waste that ability by continuing to buy RIMM and BIDU calls naked. ISE will take more market share from the CBOE and human traders on the exchange floors will continue to dwindle. At some point CNBC will stop going down to the NYSE floor because of all the tumbleweed. Hedge fund growth will have peaked in 2007. Cramer will have peaked in 2007. ETF growth will peak in 2008, and “orphan” ETFs will become a real problem.

Condor Options will have to stop accepting new members completely at some point, as you guys are sucking up some real volume now and we don’t want to make our trades illiquid.

Abby Joseph Cohen will remain bullish.

This list from Henry Schwartz at Trade Alert lists the volume numbers for the top options and top options exchanges for 2007.

A few notable items:

• 8 of the 17 listed are index products, counting VIX and XLF
• DIA comes in last on the list
• AAPL is the top single company options listing, at #5
• Around 23 million VIX contracts traded last year (the #11 spot). That’s a lot.

Think about this: the theory is that a huge chunk of options bought and sold are done so by fund managers and other big guys who want to protect stock positions. Your equity portfolio gets toppy, so you grab some SPX puts or whatever on a short term basis.

But if that’s your goal, maybe it makes more sense to buy front month VIX calls instead.  You get protection in case of a big selloff, and then some.  So we’re taking bets on whether VIX options will climb from #11 on this list to #6 or higher by next year.

Oh, also check out those exchanges.  CBOE is still the leader at 33% market share, but only barely!  ISE is breathing down their necks at 28%.

Boring rally this morning, and we’re not buying it (either literally or figuratively). Dow now hovering around 30, not a bad time to grab some negative deltas if you need them, and if you’re into that sort of thing.

Also, here’s some good reading from Nouriel Roubini: The bloodbath in credit and financial markets will continue and sharply worsen. The gist is that the major financial institutions are valuing large portions of their assets by the relatively voodoo-tastic mark-to-model model. Merrill was the only firm to come clean for awhile because it only had 2% of its assets in this predicament, so it’s basically the only firm that can afford to admit its problem. You can’t read stuff like this and not want to get short the financials in a big way. The problem is that these banks and brokers are still also the largest hedge funds in the world, and they’re not going to go down without a fight. So do we worry about the state of our economy (along with the state of our country, our culture, and our Constitution)? You bet. But that sentiment often isn’t tradeable.

We write about individual trades and strategies so often it’s easy to sometimes lose sight of the big picture. But macroscopic issues affect us just as much as anybody else, which is why you should read this article from Financial Armageddon, complete with Lou Reed quote.

If you think any of this country’s major financial institutions are much more than modern equivalents of priests, wizards, and two-bit hustlers, you probably just haven’t read enough. Level 3 assets, to extend the metaphor, serve our secular high priests in the same way that the doctrine of transubstantiation served medieval scholastics.