Low Volatility Has Options Traders Watching for a Downturn

An options market awash in complacency is signaling the stock market is ready to break from its recent run up, some options pros warned Tuesday.

Volatility Index
Close Today	% Change
20.97	+3.05
Source: ILX

Continued low readings in the Chicago Board Options Exchange Volatility Index -- which traders use to gauge the market's anxiety level -- and relatively cheap equity options prices, are suggesting to some options traders that the stock market's current comfort level is a bit too much. To contrarian traders, that spells trouble.

Put/Call Ratio
Close Today	Previous Close
0.46	0.41
Source: ILX

One options trader at a big Wall Street shop referred to "extreme complacency," and said that perhaps the market has gotten ahead of itself. The prospect of next week's Federal Open Market Committee meeting has also not brought out any notable anxiety in the market, indicating that the market has for the most part discounted the results of the meeting.

Also somewhat disquieting, the trader noted that the market tried to get a bit of a rally going early on Tuesday but that effort failed and now it's selling off. The trader added that the market "is not trading well." Further adding to some of his unease was the fact that the financial stocks were selling off, an event he said hasn't happened in quite a while.

The CBOE volatility index, commonly known as the VIX, still has its devotees as a sentiment indicator. The VIX rises when put-buying on the S&P 100 or OEX increases. A put option gives the purchaser the right but not the obligation to sell a security for a specified price at a certain time.

VIX has fallen out of favor, in part because volume in OEX options has declined significantly over the past few years, suggesting to many that the VIX may not be as reliable a sentiment indicator as it used to be. The VIX on Monday intraday dropped to its lowest level since early December, declining to 20.17.

One reason for the cheaper options prices, is that implied volatility -- a crucial part of an option's price and the measure of how much the market thinks a stock can move -- on many stock options currently is quite low.

The trader also noted that August's options expiration, which takes place Friday, looks like a nonevent.