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In Search of Volatility

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Governments toppling across the Middle East, riots, floods in Australia, continued banking issues across the globe… none of those “events” have been able to get a sustained rise out of the VIX this year. Should investors care?

Richard Repetto, Principal at Sandler O’Neill Partners was on Squawk Box and said that the VIX, commonly referred to as the “fear gauge” tends to go down as markets go up and over the past year... the S&P 500 has gained about 18-percent while the VIX has declined about 19 percent. In other words, investors tend to be more complacent when they are making money.

“There is no fear in the market”, says Michael Schwartz, Oppenheimer Chief Options Strategist. Investors are not buying puts and that eliminates some of the upward pressure on the VIX. But remember, he says the VIX is just a measure of implied volatility of options on the S&P 500—it does not reflect the volatility of some individual stocks that are trading at 2, 3 or 400 percent more than the implied volatility of the VIX.

Bill Lefkowitz, Options Strategist at vFinance Investments agrees. “The market over the last 6-months has exhibited less volatility, we haven’t seen those big one-day swings” and that creates complacency. But, he says there are individual stocks options that do indicate extreme volatility. Bill points to short-term and also, weekly options traded on the CBOE —trading opportunities that he says, offer rich premiums for very short-term risk. This week he is trading options on Las Vegas Sands ahead of earnings and also, Wynn Resorts . Financials are “dead” right now he says, as the bigger names (Citigroup, JPMorgan, Goldman Sachs…) have already reported earnings this quarter.

The “VIX is telling you that everything is stable, don’t worry”, he says.

But if you're not sure about the message, you can also take advantage of cheaper volatility and buy options. Mr. Schwartz likes cash settled puts on the S&P 500. As he says, “the hedge is your edge—you can sleep better at night and don’t have to worry about where the market goes.”

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