This Day On The Street
Continue to site right-arrow
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Sizing Up Investor Sentiment

TheStreet Premium Services

A complimentary preview
of Options-Profits Previews

Stocks in this article: SPYVIX

The S&P 500 Index (.SPX) is up more than 6% since October 9 and continues to notch new record highs. The CBOE Volatility Index (VIX), which tracks the implied volatility priced into a large series of SPX options is down from 19.60 to 13.31 during that time, showing just how dramatically investor sentiment has shifted in the past few weeks. As the demand for large institutional hedges has faded (for the moment at least), volume in the VIX trading pit has dropped off considerably.

Monday was the slowest day of the year for VIX Options, with only 160,000 contracts traded. Roughly 135,000 calls and 26,000 puts traded on the index, nearly 80% below recent average. VIX volume peaked with two all-time records set in early October. VIX touched 21 at that time as stresses related to the federal government shutdown and debt ceiling boosted volatility in the overall market.

With VIX back at the 13 level, individual company earnings have regained the spotlight. The focus has shifted to the micro from the macro and index volume has slid along with volatility. Not only has VIX seen a dramatic decline, but skew has fallen sharply as well. That is, the difference in implied volatility between downside SPX puts and upside SPX calls has fallen back to levels not seen since mid-September (see chart below).

The decline in VIX volumes and change in SPX vol skew reflect an important change since mid-October. The predominant sentiment is now risk-on instead of risk-off. The change in psychology is related to the end of the impasse in Washington and the beginning of the earnings reporting season. It also seems to be expressing confidence that the Federal Reserve won't make any meaningful changes to monetary policy until mid-2014. That assumption might be tested tomorrow, however, as the FOMC concludes a two-day meeting and issues a policy statement Wednesday afternoon.

OptionsProfits can be followed on Twitter at twitter.com/OptionsProfits

Henry can be followed on Twitter at twitter.com/OptionAlert

EXCLUSIVE OFFER: Jim Cramer's Protégé, Dave Peltier, only buys Stocks Under $10 that he thinks could potentially double. See what he's trading today with a 14-day FREE pass.

At the time of publication, Henry Schwartz held no positions in the stocks or issues mentioned.


Brokerage Partners

Top Rated Stocks Top Rated Funds Top Rated ETFs