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Guest Post: Is VIX Cheap Hedging Yet or Do Stocks Have More Leg Up?
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Based on the action throughout today, manipulation has reared its ugly head again, so expect the markets to go up regardless of what direction it should really go.
Anyone else notice that the markets seemed "ordinary" the first 3 weeks of December, for the first time since March? Sure it collapsed a couple of times, but at least it felt like it was people rushing out, not like a singular semi-visible hand was propping things up.
The last week of December as well as the two days felt exactly like that, especially with the action today in the last hour. I lost enough money last year, I'm not shorting anymore and staying long. Best to stay with the big money, and by that I mean the Fed. Bernanke wants the markets up, by any means necessary.
Well said. I'm tired of losing money and being "wrong". It is maddening and embarrassing and certainly not good for professional longevity. I give up...
Bizzle
Yes, good points. It did seem like the PPT was on vacation for a few weeks and now it's business as usual.
If you throw out the Fed induced debt orgy of 2002 to present it appears as though a buy of 20 on the VIX would have been pretty well placed indeed.
Of course we do still live in a Fed induced debt orgy so 10 might be the right number.
Is a hedging tool really that important which has been rendered meaningless by the ETF's? Risk is being hedged by many vehicles, just one of them is known as the VIX.
Waiting for the VIX to hit 10 again is like waiting for Nasdaq 5000 again. It will probably happen again eventually, but not in my lifetime.
Interesting piece, though I'm left wondering the same thing as the good Doctor.
We had a time period when the VIX hit around 10, where credit creation and economic momentum was very strong. Risky assets were embraced in a pretty broad fashion, and it showed especially in the bond market.
We don't see the same conditions now, but it's hard to argue that the fine folks of the PPT can influence it even lower than the 20 or so level we have just breached.
Not taking away from other hedging instruments, but a lot of the ETFs and such available don't work particularly well.
VIX is reliable, intuitive, and it has a floor. The only way VIX will go to zero is if the market doesn't trade. Ultimately it will become stable even when the market goes up.
Plus at a cheap level, it is a good hedge against more than just the S&P. It correlates to some CDS indices to some degree, so it is reasonable to hold against spread explosions when cheap.
VIX is a broken and irrelevant index. There are multiples more Variance swap traded OTC that causes big distortions in the VIX. No retail player should be involved with the vix. You will lose money.
VXX and VXZ were designed as fee-generating mechanisms at Lehman, now Barcap - they are awful equity hedges.
Search VIX ETF to get the results on this.
Use VIX as an indicator for bullishness & complacency, and when it stabilises in the mid teens then selling some at the money VIX puts to fund buying VIX calls is a professional cheap protection trade.
i think the market will go up till this health care fiasco is over. cant have crashing market when they trying to pass 1 trillion dollar boondagle
@ Dr. Love and Assetman:
VIX may or may not be a good buy right now. At this price it may ulitmately be great insurance, but the waiting can be deadly.
If you want a sure thing wait for 10ish. That is pretty much the theoretical bottom for VIX. Even if the market goes up, VIX won't go down.
While VIX at $10 may be the ultimate for cheap insurance, I don't know that this is a realistic target given current macro conditions. The sweet spot highlighted by the author also correlates to the heart of the recent bubble-driven bull market, where the VIX dipped below $11.25 in ~15 months between Jan 2005 and Dec 2007.
Whether we are now in a "new" bull market or just a bear market rally, I won't argue here (though for the record, my vote is with the latter), but for the purpose of this conversation, I think it is much more realistic to use the volatility seen between 1998 and 2003 as comparable to our current market conditions, beginning in 2008 and continuing through today. Unfortunately I don't have the user rights of a contributor to post a chart, so you'll have to do your own research here, but if you pull up a monthly VIX going back 10 -15 years, you will see that the floor of the volatility band in more bearish, or as Reggie would say, "Bust" conditions, is really in the $17's.
Assuming that this is a valid hypothesis, it would appear that we are much closer to hitting a relative VIX sweet spot, than what the author here suggests, unless of course you are in the camp who believes that a new golden age bull market has just begun, in which case, the author's point may make more sense.
Good insight! Succinct, clear, and on the mark.
Whether one wants to wait until the VIX hits the magic 10 number is entirely a personal decision. NTL, every point it drops below 20 puts it below average over a long period of time. You'll probably not lose money over a sufficient time horizon if you go in the mid-teens as noted above.
No matter what size selling comes in to take out the bids, within minutes a mysterious buyer comes in lifting several levels of offers, as if price (everything could be had on best bid) was of no consequence.
The smart money is selling vol in 2010. Many markets are likely to be range-bound, especially in first half of the year.
Let me get this straight. You are going to sell VIX all through 2010 if it hits 10?
I see VIX hitting over $95 before year end.