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Published: November 2, 2010
Volatility Index (VIX)
options are once again providing clues as to the stock market's
most likely direction... down.
It's been about 10 months since I first wrote about using the
premium on VIX options as a crystal ball for the stock market.
Since then, the crystal ball has been dark. Other than right
before the flash crash, VIX option traders have been clueless –
showing no real bias, bullish or bearish, all year.
But that's changing now.
Remember, the Volatility Index is a measurement of fear in the
marketplace. When the VIX is high and rising, investors are
scared and traders are bearish. A low and declining VIX
indicates strong bullish sentiment and complacency among
traders.
The VIX is a good contrary
indicator, and it does help warn investors when the market is at
extreme levels. But it's not of much use when stocks are
range-bound, as they are now and have been for the past couple
of weeks. Instead, the best clues come from VIX options.
VIX call options for December expiration are now four times more
expensive than the equivalent put options. For example, the
Volatility Index closed last Friday just over 21. The VIX
December 21 call options closed at $4.20, while the VIX December
21 puts were just $0.90.
Traders are clearly betting on an increase in volatility as we
head into December. And an increase in volatility usually
translates into a decline for stock prices.
The November option series, however, doesn't look quite so
ominous. The VIX November 21 calls were priced at $1.65, while
the November 21 puts were $1.20.
There's a slight bias toward a higher VIX heading into November
expiration, two weeks from this Friday. But the difference in
the call and put option premiums is relatively insignificant.
Many of my short-term trading indicators are warning of an
impending stock market decline. But the VIX option premiums
suggest we may be in for a couple weeks of sloppy, back and
forth trading – similar to what we've seen over the past several
sessions.
The real downside fireworks should light up around Thanksgiving.
-- Jeff Clark
Editor
Growth Stock Wire
Note: This article originally appeared on
Growth Stock Wire |
