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Options Intelligence Report: CBOE Vix Index (VIX)

VIX – CBOE Vix Index
Volatility Declines Yet Again In Options Land

Abundant liquidity, a slide in the dollar symptomatic of rising risk appetite or rising earnings expectations for 2010. Take your pick as any of the above could be used to justify the investor optimism in a rally once again teetering on the verge of yet another upside breakout for the S&P 500 index. And as that happens the so-called fear gauge just becomes more and more depressed as the need for insurance arguably diminishes.




Yet a brace of options trades today appear to disagree with current expectations of lower volatility ahead. Using December call options an investor paid a mere net four cent premium to establish a ratio call spread that predicts fear will return before mid-December. The investor bought 25,000 calls at the 27.5 strike and sold 50,000 at the 32.5 strike to create a spread that would work if the Vix could find the appetite to rally from its current 20.41 level.

In the January contract it appears that an investor wrote 12,000 put options at the 20 strike for 35 cents in the expectation that volatility won’t fall much further than its current value. Some investors will be hoping that such trades are a poor indicator of market direction and instead will be hoping for the proverbial Santa Claus rally starting next week.

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