Tuesday, April 26, 2011

Volatility and the VIX

We were just speaking of the VIX in class last week. For in SIMM we are buying some puts to protect the portfolio especially over summer break. So these two articles should be of special interest to the class.  

volatility-barrons: Personal Finance News from Yahoo! Finance:
"VIX's main drawback is that it provides only a 30-day snapshot of the expected movement of the Standard & Poor's 500 Index. VIX is composed of a series of the index's put and call options that expire in a month. But because VIX is expressed in a single number, like a stock, most people think they understand it. They rarely realize they are applying a stock-market mentality to the options market—and that is wrong and potentially dangerous, because it creates a false feeling of safety. The options market is far more multidimensional than the stock market.

Right now, VIX futures prices are higher than VIX."

 Bloomberg/BusinessWeek mentions that the while the VIX is low, the skew is high because (despite put-call parity), puts are slightly more expensive than calls.
"The end of the Federal Reserve’s Treasury repurchase program is prompting options traders to pay the most in four years for protection against stock declines, a signal that proved bullish in the past.     
The cost of three-month put options to sell the Standard & Poor’s 500 Index is almost twice the price of calls to buy, the highest ratio since July 2007, according to data compiled by Bloomberg. The last 17 times that so-called skew rose as high, the benchmark gauge for American equities climbed a median 3.9 percent over three months, data compiled by Bloomberg show."

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