Option Action Lacks Conviction
Another important option gauge is the CBOE Market Volatility Index, or VIX, which measures the implied volatility of the S&P 500 options. It's important to remember that the VIX is a measure of the implied volatility of the S&P 500's 30-day options. The fact that the VIX hit a 10-year low of 10.33 in late July was more a reflection of the index having been bound within a narrow trading range than a sign of complacency.
Indeed, during August, when the S&P was trending down, the VIX was the mirror image, staging a monthlong climb that hit a high of 13.96, and culminating on Aug. 29, when hurricane Katrina hit land and the market marked a bottom.
The S&P has since climbed some 2.7% and the VIX has declined 10% to 12.56. Usually a surge in volume and a decline in the VIX would be a sign of optimism or bullishness. But right now it seems that investors are taking advantage of the low volatility to buy cheap options to reduce risk. This can take the form of either purchasing put protection or buying calls to replace long positions, both of which are forms of risk reduction. While this may represent a healthy level of prudence and caution, it is not the type of activity that propels stocks to new highs. Until volume turns back up, the upside will be limited.
Select the service that is right for you!COMPARE ALL SERVICES
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV