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Volatility Holiday Hangover?


Look at Mr. VIX chugging that egg nog

Forgive me if you have seen this movie before, but the Volatility Sisters are imploding yet again. As most experts will tell you, it is not the (pathetic) absolute levels that matter, but rather their relationship with themselves, that is how they compare to their own Moving Averages.

And by that measure, the VIX, VXN and VXN all reside at varying degrees of oversold. But is it as bad, and ergo bearish (for the market) as it seems? I would argue that (gasp) it is different this time. This time of year I mean.

Option traders are notoriously forward looking. Not as visionaries; we don't pretend to know what the Fed will do in the summer of 08, or how well PlayStation 56, the one with the implantable chip and the life size John Madden, will sell.

But we do anticipate the immediate calendar ahead. And that calendar right now contains a perfect storm of lousy news for option premium. January is a 5 week cycle, and Week 1 in that scenario is traditionally an awful time for volatility no matter what. Then, stir in two straight holiday weeks, and before you know it, there are only 14 trading days, and 19 calendar days, to see any action. But wait, subtract one more trading day for Martin Luther King Day in the last week of the cycle, and you have a recipe for a true lack of tradable action.

So bottom line, the calendar says there are 35 days between now and January expiration, but between all the off days sluggish trading around the off days, options price in a cycle maybe 20-25 days long. The "real" VIX may not be as low as that reading on the screen.

A VIX/VXO under 10 and a VXN taking bar mitzvah are cheap no matter how you slice it, but I would not get carried away with those numbers at this particular time of year.
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