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.
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.
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.
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.
Daily Recap Newsletter