Posted by: jhamon | March 17, 2010

MysteryHedgie Presents: The Case of the Collapsing VIX

Derivative Capitulation… after 3 days of utter silence on the trading desk, option holders are urgently selling March and April stock and Index options to capture eroding premium or, given the “war stories” we’ve heard, to stop losses.

The VIX (below) tells the story; after January’s sharp reversal in volatility, few expected the steady grind lower in option prices of the past 5 weeks; fewer still have risk managers willing to allow short option bets below VIX 20. Option prices, (unlike stocks) mean revert over time; if you believe that government involvement in markets and macro uncertainty can offset global central bank dovishness, protect/enhance/substitute part of your stock, commodity, currency and interest rate exposure through options.

March’s history of market turning points is again worth noting.

VIX Collapses.  Triumph of the Central Bankers?

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