The VIX as an indicator has been considered by many to be broken, but frankly that is just nonsense.  The indicator is doing what it is supposed to do, reflecting the positioning of option traders in the SPX 500 contract.  That bet is not always right, and we saw that recently. 

A month ago when the market tanked following the Memorial Day someone went long volatility and bought a slew of June VIX 17 calls (bearish call on markets).  That bet went down in flames last week as the options expired worthless, never coming close to being in the money.  Coincidentally on that same day another buyer stepped in to buy some July 23 strike VIX calls, and that bet appears to also be a loser next month.

vix_062415.jpg

These bets are mostly hedges by large institutions and hedge funds trying to protect their portfolios, and mostly done when volatility is low – as it is now.  Simply put this means options are cheap and the cost of protection is low. 

Why not purchase some protection when option prices are low?  Implied volatility is down and option prices are depressed.  What if the market has a fit over a Greek deal (or no deal)?  Wouldn’t you like to have some protection in place? 

I will look at SPY or DIA put protection over the next several days, and trimming portfolios.

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Explosive Options