Sorry!! The article you are trying to read is not available now.
Thank you very much;
you're only a step away from
downloading your reports.

It's Time to Buy Volatility

By

For the first time in over four months, options, or implied volatility, is inexpensive and represents a buying opportunity.

PrintPRINT
Now that we have passed through these events, IV and HV are reverting to their mean. Implied volatility, or the cash VIX, is down to 14 and the 30-day HV is up to 12.5. Note that the HV, or actually realized volatility, rose even though the market rallied following Ben Bernanke's pledge of QE infinity. Again, volatility is not based on direction, just the magnitude of the move, and the surge following the Fed announcement was the last move in several months.

The VIX futures and its term structure also flattened out with front October now trading 15 or just 7% premium, and the November futures are now trading 17.50 or 25% premium to the front month. December futures are down to 22 or a 28% premium to October, which is down from the 60% premium. This convergence of prices and squeezing of some of the excessive premiums suggests options are now relatively inexpensive.

Problems Still Loom

While we have passed through several key events, many of the larger macro issues that inflated IV during August remain in place and could potentially come back to haunt the market in coming weeks and months. We are facing the fiscal cliff, the uncertainty of the US election, the lack of any real resolution or solution for the eurozone, geo-political unrest on the rise, and the beginning of earning seasons, which ticks up volatility even in the best of circumstances.

And as long as we are talking about reversion to the means statistics, note that neither the Dow Jones Industrial Average (INDEXDJX:.DJI) nor the S&P 500 had suffered a decline of 1% or more in over 63 trading sessions. This is the longest period in over six years. On Tuesday we finally got that 1% decline in the S&P and the VIX popped 11% to the 15.7% level.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

Copyright 2011 Minyanville Media, Inc. All Rights Reserved.

PrintPRINT

Busy? Subscribe to our free newsletter!

Submit
 

WHAT'S POPULAR IN THE VILLE