Finally Volatility Buyers
We are now starting to see two way order flow. We still have seen almost no hedgers buying puts (except for earnings plays like in CSCO), but are starting to see professional volatility players putting back on long convexity plays. I view this as sort of like buying value: options prices had gotten so cheap, especially in the financial names, that there is little downside to buying them neutral, and great upside if volatility begins to pick up in the market.
For those of you who follow me you probably know what I am saying. In basic terms, given the macro-economic environment I believe volatility is too low and have been patiently setting up long convexity (long straddles) positions in anticipation of an increase. Now that much of the "weak" hands have finished selling out their long convexity, strategic buying is occurring.
It is too early to tell if this will continue, but it is a data point. The next phase would be hedgers returning to the market buying puts. This usually occurs during a market decline.
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