Despite the Dow's move above 14,000, there’s evidence from the Volatility Index, or VIX, that investors are preparing for more volatility in the market.
The VIX is calculated through the implied volatilities of a variety of index options tied to the Standard & Poor’s 500 Index. The VIX is known to rise, or remain elevated when investors anticipate potential swings in the market. .
Even as market benchmarks--including the S&P 500--reach records, the VIX has given up little of its gains this year.
“Investors want to own volatility right now,” says Stacey Gilbert, chief options strategist at Susquehanna Financial Group “Honestly what we’re seeing is buyers of options on indices, ETFs, particularly in the S&P 500 which is going to keep that Volatility index higher as the moves are much, much bigger” in the market.
While I.A. Englander’s director of investment strategy, Scott Fullman, sees the possibility that the Dow could cross above 15,000 this year, he feels the elevated VIX is an indication that investors are factoring in risk from problems with subprime loans.
Fullman also says, “there are some position adjustments going into expiration Friday that may be slightly distorting the volatility picture, but VIX buying is also factoring in some concerns about near term momentum since the market has gone up, up with no meaningful correction”.
A market “correction” is defined as a decline of over 10% in the market. Since bouncing off the lows of 2003, the market has yet to experience a 10% correction phase.
Zimmer Holdings
Speculators have been piling into call options of Zimmer Holdings, a producer of orthopedic implants.
Information services such as theflyonthewall.com have reported "takeover chatter" surrounding Zimmer Holdings .
Andrew Wilkinson, chief strategist at Interactive brokers says “fresh positioning is going through on the call side, at the July 90 strike, where new positions were entered in more than 6,000 contracts this morning, just three days before expiry.”
That says Wilkinson is a daring bet with just a few days to go before expiration.
Call buying has also been heavy in the August contracts including volume exceeding option interest in call strikes up to the 95 level.
The stock’s 52 week high is $94.38. Wilkinson says the “25 percent delta on the 95 contract indicates that traders see a one in four chance that this rudely optimistic bet will turn a profit within the next month.”
Delta is the chance of an option landing at in the money at expiration.
A Zimmer Holdings spokesman said, “we don’t comment on rumors.”