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As the VIX index drifts around ten year lows, we are selectively buying convexity. We are specifically targeting companies with high debt (poor balance sheets) and each with a secondary theme, such as currency exposure. These names have generally underperformed the indexes.

The one thing we noticed in studying these names in particular is that even though their option prices have come down quite a bit, they are in general still trading above the actual volatility of the stock. In other words, the option prices are predicting that the actual volatility will pick up from their current levels.

We have found some names where this is not the case and are building positions in them. But the data point that you can discern from this analysis is that although there seems to be more and more complacency in the general market [Intl Bus. Machines(IBM:NYSE)option prices are extremely low], in the segment of the market where debt is still very high, there is not yet significant complacency.

This sector of the market is particularly sensitive to interest rates and therefore the money supply. M3 numbers come out this afternoon.
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Position in IBM

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