By Jud Pyle, CFA, chief investment strategist for the Options News NetworkVIX this, VIX that -- why is it relevant? The CBOE SPX Volatility Index (VIX) has risen to prominence in recent years, especially among the options-trading crowd. No longer just seen as a "fear" barometer, defined by peaks and valleys, the VIX helps make sense of the wild world of options trading. Lately, the chatter surrounding the VIX has been that it has been deflating. Since hovering around the 75 mark last fall, the index has slowly declined and is now perched in the 40 area. So what, you say? Well, today, we're seeing two real-life examples in the financial sector of how reduced volatility can come back to bite call-buyers, especially those holding out-of-the-money positions.
Volatility is coming in on this stock, and what is even more notable is that V doesn't report earnings until April 29! It is typical to see volatility collapse after earnings hit the wire. Not so normal when it dries up in the days leading up the report. About 6,000 contracts changed hands in the first 30 minutes of trading on open interest of 6,562. Now, we don't know if these positions are being sold-to-open or sold-to-close, and that really doesn't matter. What is important to note is that calls can still be in the red even if the underlying stock is flat or higher. The Black-Scholes model has five dynamic variables, remember, and volatility is among the most dynamic of all of them (along with stock price). If you remain unconvinced, and think that volatility may ramp up before May expiration, there could be some good opportunities out there, as there is a decent supply of cheap options. But be wary, the VIX monster is holding some of the cards. Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.