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Pisani: Traders Buying Up Volatility. Why?

Tough end to the week. For the first time in months, the last two days has seen some notable call buying in the CBOE Volatility Index (VIX) — in other words, traders are buying volatility.

Also a notable uptick in the put/call ratio (the ratio of put buying to call option buying).

Why? People forget things were a lot more volatile six months ago, but in the middle of last year traders got so beaten up shorting the market that everyone stopped shorting and stopped buying puts. (See:VIX/correction outlook from Brent Wilsey & Alan Valdes.)

With the uptick in uncertainty—about China, about banks, about Bernanke—traders can smell that they can make a few bucks shorting the market.

What I don't see is really big volume—higher than normal, yes, but not really big.

This tells me it is still relatively few firms that are lightening up.

Bears beware: since March, traders have been rewarded for buying the dips—and we are only 5 percent off the 15 month highs we hit on Monday!

You can see the effect that talk about China raising rates had on commodity stocks this week:

Commodity stocks this week:

Alcoa down 14%

Freeport McMoRan down 12%

Newmont Mining down 7%

US Steel down 12%

Mr. Obama's speech on bank regulation was met with a selloff in banks:

Financials this week:

BofA down 9.0%

JP Morgan down 11%

Morgan Stanley down 10%

SunTrust up 5.5%

The market has taken on a decidedly defensive tone, as several stocks are still in the black:

Consumer stocks this week:

Safeway up 6.9%

Kroger up 5.0%

Colgate up 1.0%

Kellogg up 0.3%

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  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

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