Red Friday

• Posted by Adam Warner
• on November 29th, 2009

We interupt the 2008 Volatility Melt to bring you a special Volatility Explosion.

Remember the old “10% Rule” in the VIX. When the VIX is 10% below (above) the 10 Day MA, it’s considered oversold (overbought) and bearish (bullish) for the market. Well amazingly, by this loose definition, the VIX traversed from (almost) oversold to (barely) overbought in one session. Let me put that in caps for emphasis. IN ONE SESSION. That’s really rough to do, I mean you need a greater than 20% lift and you need it to start at oversold.

Friday’s usually lead to volatility selloffs, with the notable exception being when everyone’s more afraid of a news disaster than a few days of weekend decay. This is clearly one of those times.

Who’s not really afraid? VIX futures traders. Decembers closed at a .75 discount, meaning that $2 premium evaporated overnight, And then some. So you have a real mixed picture here. On one hand, actually options traders apparently didn’t want to head off for the weekend without some put protection, which is quite bullish. On the other hand, futures traders seem to consider this a blip that will fade like the Giants playoff chances.

Personally I think the futures have it right, so made some options and put spread sales on Friday. Left room for more as these things can linger a few days, so will go from there.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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