Option Investor
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Market Volatility falls to 21.22

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A "downside alert" was triggered on my trading station this afternoon at the 21.22 level, and it's time for a quick review of the VIX.X and what I think traders may want to monitor into early next week.

It seems like yesterday that we received an "upside alert" at VIX.X 40.03, which had us on the alert for institutional put selling with the bullish % at lower levels and option premiums at higher levels as depicted by the VIX.X. Now, here we are, with the bullish % at higher levels and the VIX.X entering my "everything is bullish" zone.

Here's a link to the intra-day update we discussed back on March 12, 2003 for some background on what I'm looking at today, and will be monitoring in the coming sessions. What a BULL does NOT want to see, is just the opposite of what a BEAR didn't want to see on March 12. A sudden intra-day reversal or sharp reversal from my "everything is bullish zone." Here's the link to that March 12 update. (this isn't a live link, but you can highlight it with your mouse, copy it, and paste it into an open browser). http://members.OptionInvestor.com/archive/intraday/2003/inupd_3122003_774.asp

Now lets take a look at where we are. I'm currently "on the alert" for a potential "asset allocation" program where we could find institutional selling, if not at least some type of major option activity, which in my opinion, would most likely be found in institutional put BUYING. You see, it is my opinion (Jeff Bailey) that INSTITUTIONS will SELL premium when VIX is high, but they are more willing to BUY or pay up for some premium in options when premiums are LOW.

Here's TODAY's chart of the VIX.X. Note, this is a daily bar chart so that we can see what the VIX.X has done since March 12 and how level after level has been violated to the downside and given the impression of bullishness building as more and more call buyers and put sellers have come to the market.

Market Volatility Index (VIX.X) - Daily Interval

Let's first understand, that TODAY is an option expiration Friday, so this will undoubtedly have some impact on the VIX.X. Let me also say, as I've said before, that I DO NOT LIKE TO USE THE VIX.X by itself to try and understand "overly bullish" or "overly bullish" market environments. I received MULTIPLE e-mail that a market top was going to be found on April 16, "just because the VIX.X was nearing 25.66! Unfortunately for VIX.X traders, the S&P 500 Bullish % ($BPSPX) was only at 48.4% and not very close to a more "overbought" level of 70%.

Now, here we are at a lower level of VIX.X, but the S&P 500 Bullish % ($BPSPX) has grown to 67.6% bullish. I understand, and traders/investors should too, that the bullish % can always go to 100%, but I want us to be on the alert today, and in coming sessions for a REVERSAL based on some type of asset allocation taking place. Similar perhaps, but just the inverse of what took place on March 12 of this year at the 40% level.

I would think that we might be nearing a "prime point" for some type of shift to take place or at least begin taking place.

If I were an institutional market maker or large firm that held massive amounts of bullish stock inventory, it might make sense to buy some protective puts on inventory that I feel vulnerable, and hasn't been participating in a very bullish market since March 12.

I had a couple of questions from traders regarding the selling of NAKED PUTS on stocks that look bullish. For the most part, I would rather SELL NAKED PUTS when PREMIUMS are HIGH and the BULLISH % charts are at low levels, not when option premiums are LOW and the bullish % are at higher levels when "market risk" is higher for bullish types of trades. This is a "blanket" type of statement/thinking, but if I feel this way about a market, then I've got to be careful of sector and stock risk too!

Make note if you are a trader or investor. Did you or I NEED to buy calls on March 12 to make money? No. Do I NEED to buy puts today to make money? No. What I'm doing here is MAKING A NOTE and will look to build on this in coming sessions.

Note, so far, since March 12, when the VIX.X has broken BELOW a level, it has NOT gone back above the prior level. Make note of this too! If we see a change in this pattern, then something is CHANGING! It's that CHANGE where we then look to trade and benefit from.

Jeff Bailey

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