CBOE Volatility Index
has managed to hold in the 13% range all week and failed to hit a new recent low, even as the SPX closed at an all-time high on Friday. I am borderline incredulous that the market is able to keep moving higher like this, watching VIX hold as the SPX moves higher. There are only three potential options:
1. The market is moving at such a high rate of speed that a VIX of 13 make sense
a. Based on how much the market is moving on a daily basis I think we can all agree that this is not the case
2. I am wrong, the VIX is holding 13 because the market is going to make a violent move higher and maybe we move to 1850 by the end of the year
a. Entirely possible, but historically somewhat unlikely
b. Unlikelihood scenarios are what create rich guys and cause rich guys to go broke in this industry
c. Taper is now believed to be moved out to March, who knows how high we could go, and how fast.
3. Something is coming that will confirm my suspicion that we are getting toppy. I don't know what that scenario will be, but it could mean the will has to be more aggressive, or bad earnings and economic data or a negative U.S. government event. It doesn't matter. All that matters is how traders approach this market going forward.
With a VIX of 13-14 and SPX up more the 20% this year, hedging with either VIX or SPX options is the cheapest overpriced hedge that every trader should be making.
Insurance is always overpriced, but there are times when it is more or less a good deal. When people don't have a lot of money, in their 20s and early 3's they should probably whole life insurance. It's at its cheapest...even though it's blasted expensive. So most people simply by term. When people are older, whole life is more expensive, in relative terms, but it's cheaper because the person has more money. At this point people probably should by term, but because they can afford the bigger policy they choose to get the expensive whole life.
Right now, the SPX and VIX are presenting the market with an incredible opportunity. Traders can buy whole life policy at the rate of a young and healthy 25 year old using gobs of money that has been made in the last year. Basically, if one has the money to buy insurance, when they are rich and 25 years old that last for their whole life...they should think about doing it.
Essentially, it really doesn't matter which of my scenarios are right or wrong. If I was long the market for most of the year and up 15%-20% I would be backing up the truck in portfolio insurance buying puts up against my longs.
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At the time of publication, Mark Sebastian held positions in VIX.