Options Traders May Be Too Bullish for Their Own Good
The path of least resistance is for short-term event volatility to rise.
According to the classic 10-day simple moving average measure -- which has the VIX currently sitting 11.7% below that level -- the VIX is now in an "oversold" position according to both TradingMarkets' 5% rule and the more stringent 10% threshold used by other traders.
From a volatility-term-structure perspective, the VIX is also oversold. Notably, the VIX:VXV ratio -- which compares 30-day volatility of SPX options to 93-day volatility (using the VXV index) -- closed at 0.896 today.
In the chart below, you can see that when this ratio closes at 0.92 or below, the bears tend to have an upper hand for at least several weeks. When the ratio drops below 0.90, as was the case yesterday, the odds shift even more favorably in the direction of the bears.
Click to enlarge.
In brief, the low current levels in the VIX:VXV ratio suggest that options traders are too bullish and complacent in their 30-day outlook (event volatility) relative to their 93-day outlook (structural volatility.)
While these 2 volatility measures can be brought back into line by lowering estimates of long-term structural volatility, the path of least resistance is for short-term event volatility to rise.
This means the odds favor that the VIX will move in the direction of the VXV, which closed at 29.41 yesterday. Of course rising volatility tends to favor the bears at the expense of the bulls. Even with yesterday's exceptionally strong close, longs should consider taking profits and/or initiating short positions.
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