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Minyan Mailbag--VXO



Note: Our goal in Minyanville is to remove intimidation from the financial markets and encourage an interactive dialogue among the Minyanship. We share this next discussion with that very intent.

Professor Succo,

I understand that a low VXO indicates relative complacency about future market volatility. However, why is the fact that the VXO at a 9-year low right now necessarily bearish as many traders are currently claiming it is? In 1995, just as the market started its huge run, the VXO spent almost the entire year in a range from about 10 to the mid-teens. That low level certainly did not portend any market decline (quite the opposite) so why should it in 2004?

Just trying to understand this index better.


Minyan David


Low option prices indicate complacency as we have talked about. Complacency by itself does not cause a decline. It can mean that investors are fully invested so that any decline will not be met by new buying. It also means that there is high gamma in the system, so any decline will be met by more selling than if option prices were high because option traders must re-hedge more aggressively.

There are other forces much more powerful that could drive the market higher even in the face of complacency. But all other things being equal, complacency on the margin just increases the odds of a possible decline and the velocity of such.

So complacency (as indicated by low option prices) is not necessarily a cause for a decline, but rather will normally exacerbate it if one begins.


Professor Succo

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