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VIX Indicator: Panic and Run or Hold Your Ground?

Fast Money trader Jon Najarian /
Wednesday, 18 May 2011 | 12:40 PM ET

“I have discovered in 20 years of moving around a ballpark, that the knowledge of the game is usually in inverse proportion to the price of the seats.”

— Former White Sox owner Bill Veeck

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From my experience at ballparks, Mr. Veeck was dead on with that comment. Those that occupy the best, thus highest priced seats clearly demonstrated a lack of familiarity with baseball when compared to those that didn't just show up to be seen at the game, but rather showed up to watch and enjoy the game. The nuances of advancing runners into scoring positions and when a pitch out is more likely to catch a runner stranded.

That's why its funny to see those in the best seats on Wall Street similarly with that inverse proportion of knowledge of how and why things work as they do in the world's largest legal casino.

The DJIA goes on a multi-session losing streak, and some regular practitioners that should know better fail to interpret what a small move in volatility actually says about where we are and where we will likely be over the next weeks of trade.

The surprise should be even greater if you consider that this week being May options expiry means that those with protection on their portfolios must either roll the expiring options into the next month or quarter, or risk coming in Monday next week without any insurance.

That scary prospect is usually enough to lift option premiums more than usual into a weak market, what with the scramble to roll out the positions and all. But instead this week, in the midst of that multi-session sell off I mentioned, we see the risk metric falling back towards recent lows!

As of this writing the VIX is trading 16.85, 2 full points beneath the highs of the week. All that while the S&P 500 tumbled 26 points.

As my brother Pete says, that's a 'tell'. A poker term for the tip off that something is about to play out, and in this case the VIX was saying rather than panic and run, traders should hold their ground and play out the final days of expiration.

Another interesting thing about volatility (and by the way I am in Europe to deliver a talk on volatility tomorrow), is that you can plot the implied volatility of any option class, and one that I've been asked about more than any other over the past three weeks has been Silver.

The Silver ETF (SLV) option volatility has cut from readings north of 90 to 63 in the past week. Similarly, the double inverse ofSilver (the ProShares ZSL) has dropped from 170 in the front month to 120 percent volatility. Both readings are still quite extreme, but the moves lower in volatility are now saying the same thing about that precious metal that the VIX was saying about the S&P 500; don't dump 'em here!

* Jon Najarian is co-founder of optionMONSTER.com, a news and information site for options traders.

For the best market insight, catch 'Fast Money' each night at 5pm ET, and the ‘Halftime Report’ each afternoon at 12:30 ET on CNBC.

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Trader disclosure: On May 16, 2011, the following stocks and commodities mentioned or intended to be mentioned on CNBC’s "Fast Money" were owned by the "Fast Money" traders; Terranova Owns (OXY); Terranova Owns (XOM); Terranova Owns (KSS); Terranova Owns (BJ); Terranova Owns (DIS); Terranova Owns (TM); Terranova Owns (MCD); Terranova Owns (PEP); Terranova Owns (PFE); Terranova Owns (BAX); Terranova Owns (V); Terranova Owns (JPM); Terranova Owns (VRTS); Finerman and Finerman's firm own (AAPL); Finerman and Finerman's firm own (BP); Finerman and Finerman's Firm own (CMI); Finerman's Firm owns (IBM); Finerman owns (C); FInerman owns (JPM); Finerman's Firm owns (JPM) leaps and (JPM); Finerman's Firm owns (TGT); Finerman owns (UNG); Finerman's Firm is short (IWM), (MDY), (SPY); FInermans firm is long S&P Puts, Russell 2000 Puts;Weiss owns (UUP); Weiss owns (NS); Weiss owns (ETP); Weiss owns (COP); Weiss owns (DVN); Weiss owns (BRCM); Weiss owns (MRK); Weiss owns (AKAM); Weiss owns (DE); Weiss owns (NAV); Weiss owns (JPM); Weiss owns (HBAN); Weiss owns (NIHD); Weiss owns (HK); Weiss owns (TWM); Weiss is short (X)

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S&P 500
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SLV
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VIX
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SLRC
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