Looks like the biggest derivatives trade of the week is buying VIX options. That’s the way most hedge fund managers are going to protect themselves from wild swings in the market, expected all week long thanks in part to the US credit downgrade to AA+ from AAA by Standard & Poor’s on Friday, and the ongoing sovereign debt drama in the eurozone.
“My option strategy is the VIX and only the VIX,” says Joel Smolen at Axion Capital, a San Rafael, Calif hedge fund.
Lou Gerken of Gerken Capital in San Francisco also said he is buying VIX options, along with shorting the S&P 500, going long gold and silver futures and long Swiss Franc/Dollar and Swiss Franc/Euro.
VIX is the ticker symbol for the CBOE Volatility Index. As volatility often goes hand-in-hand with financial turmoil, the VIX is also known as the “investor fear gauge”.
The VIX index is quoted as a percentage that represents an expected annual change of the S&P 500 index and it measures the market’s expectation of 30-day S&P 500 volatility as reflected in the prices of near term S&P 500 index options. As investors expect bigger movements, options tends to become more expensive.
The VIX closed Friday 32, closing in on its 52 week high of 32.07. It traded as high as 39.25 on Friday before settling lower after the European Central Bank said it was standing by ready to help Italy in the event of a bond default. The VIXs 52 week high will probably get breached on Monday when the market opens in Chicago. The VIX hit 80 during the peak of the 2008 financial crisis and topped 31 during last Thursday’s sell-off in US and European equity markets.
No comments:
Post a Comment