Failure of VIX to move up on the stock mkt decline tells us ...
Clearly this is unusual to see a market setback like this without any surge in the price of insurance for index options.
This tells us something big is happening:
Possible scenarios:
1. Mutual funds are just rotating cash out of stocks and into bonds and not hedging against their own selling = unusual.
2. Covered call mutual funds are selling massive quantities of call options against long positions and damping the price of volatility. Market makers in options are so stuffed with long call positions that the only natural thing to do to free up capital is to sell short the underlying and that is putting pressure on prices of stocks.
The movement of VIX is usually extremely helpful in announcing to the market when enough hedges are in place to then steady a decline. I refer back to my previous posts in VIX to read other descriptions of this phenomena, so I don't have to re-type it again here. Essentially, people buy options when they are very bearish and are shorting stocks and using the calls to hedge against losses. Also, bulls use call buying to leverage up on a perceived rally in prices.
There are many people who use the options markets to hedge risk and watching the price of insurance does give us an idea of when people are stepping up and paying the offered price on puts or calls. This time, however, is a bit more unique and it is telling us a story. If prices go down meaningfully from here, people will point to the low VIX reading as sign that people were not scared. If prices go up meaningfully from here, then people will point to the low VIX reading and say that it doesn't matter anymore and that the financial markets have so many different instruments in them to hedge with that it all neutralizes out.
If there is a signal that I can take a trade on, I will post it.
Tim 1:11PM EST 5/15/2014
This tells us something big is happening:
Possible scenarios:
1. Mutual funds are just rotating cash out of stocks and into bonds and not hedging against their own selling = unusual.
2. Covered call mutual funds are selling massive quantities of call options against long positions and damping the price of volatility. Market makers in options are so stuffed with long call positions that the only natural thing to do to free up capital is to sell short the underlying and that is putting pressure on prices of stocks.
The movement of VIX is usually extremely helpful in announcing to the market when enough hedges are in place to then steady a decline. I refer back to my previous posts in VIX to read other descriptions of this phenomena, so I don't have to re-type it again here. Essentially, people buy options when they are very bearish and are shorting stocks and using the calls to hedge against losses. Also, bulls use call buying to leverage up on a perceived rally in prices.
There are many people who use the options markets to hedge risk and watching the price of insurance does give us an idea of when people are stepping up and paying the offered price on puts or calls. This time, however, is a bit more unique and it is telling us a story. If prices go down meaningfully from here, people will point to the low VIX reading as sign that people were not scared. If prices go up meaningfully from here, then people will point to the low VIX reading and say that it doesn't matter anymore and that the financial markets have so many different instruments in them to hedge with that it all neutralizes out.
If there is a signal that I can take a trade on, I will post it.
Tim 1:11PM EST 5/15/2014
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