Theoretically, you could say that the VIX should have risen well above 20 today. Just the 40 point high to low move intraday implies at least a 20 VIX in my mind:
40 pts high to low / 1687 index = 2.37% x sq. root of 252 trading days (15.87) = 37.62 volatility.
Of course, that is part of the fun in modeling derivative prices: demand determines the key pricing element of an option, the implied volatility, or expected standard deviation (square root of the variance, or in essence the deviation from the average price over a certain period). Just as I discussed in the last post that the option market (re:VIX) was underpricing call options as the S&P made a 7% move off of the April lows.
Call options over the last month were making hundreds of percent in days. Now if you believe that the market displayed a key reversal, (it is still May remember, and June is the second worst month for stocks, just thought I’d mention that) you can still get puts uber-cheap, since the VIX barely noticed today’s move. Same for calls if you’re bullish. Straddles may make a nice bedfellow if vol picks up or if you’re nimble enough to trade them both ways.
The VIX is just not interested in any kind of market move. The put/call ratio hit extreme levels, not seen in years yesterday:
The VIX futures are bored stiff:
|VX K3-CF||S&P 500 VOLATILITY||May2013||16:58:33||13.17||-0.38||13.17||13.17||13.17|
|VX M3-CF||S&P 500 VOLATILITY||June2013||17:01:19||15.30||-0.13||15.25||15.70||15.00|
|VX N3-CF||S&P 500 VOLATILITY||July2013||17:01:18||16.40||-0.11||16.32||16.65||16.05|
June futures actually fell in a sign of complete faith in the Bernanke. And what does this mean?
Price targets on the S&P are getting almost comical now at the brokerages. And we all know, that those knuckleheads are just as bad OR WORSE, than individual investors. They raise them at the highs and lower them at the lows:
Who knows, maybe this is the 25% S&P type year of decades past. But GDP and revenue growth existed back in those days, so we are flat out in sentiment stampede if this is going to occur.
I digress. Bottom line, options are cheap and today didn’t change that.