The VIX Bleeds

The VIX continues to bleed today. I have been a seller of premium for the past year but at these prices the strategy no longer makes sense. As much as I hate to pay up for options, at these prices it is becoming hard to justify not replacing stock positions with options.

7 comments:

Anonymous said...

I have enjoyed and benefited from your supply and demand approach to the market. The current market might turn after earnings season when firms take advantage of current price levels to issue stock. Then I suspect it will be time to short.

My favorite supply and demand scenario of this type is a stock entering the S&P like Visa just did. I found a dated study showing that in the 10 days prior to entering a stock rises on average 8.5% and falls 3.5% in the following 10 days!

Tsachy Mishal said...

There have been a number of secondaries announced today. Not enough to move the market but a lot for right before earnings. Most companies are in a lockup period and can't sell stock.

If we are seeing a bunch of secondaries now this likely means we will see a lot of offerings later in the month.

Tsachy Mishal said...

Its funny that you say that because this approach has not worked very well recently. It usually works a lot better.

Although buying pharma on the closing of the Wyeth and SGP deals was a home run, it hasnt worked very well on the market as a whole. A few years ago it was like clock work.

PJ said...

Tsachy - It's working great, I think, but you have to see all the sources of supply and demand. The overwhelming source has been the Fed's $1.8 trn risk asset purchases. They basically borrowed short -- selling $800 bn T-bills from their portfolio and borrowing $1 trn from the banks short-term (but with an undoubted commitment to roll over indefinitely) at 0.25%, and bought $1.5 trn toxic MBS and $300 bn long-term T-notes and bonds. That's a huge demand for risk assets. The people who sold their $1.8 trn of risk assets to the Fed went into other risk assets, not T-bills. So that leveraging up of the Fed is new demand. It's the reverse of the deleveraging of the hedge funds that drove the market down in late 2008.

I think there's another source of equity buying too, one which intervenes at key moments, and which has a special concern for how weeks start, years start, and what closing prices are, and correlates its buying with when banks need to raise capital (May, Dec) or the health care bill faces critical votes (Aug, Sept, Dec, Feb 2010?).

I've learned from you that supply and demand considerations can dominate even on a short-term basis, which is interesting. Still learning how to track those things.

Tsachy Mishal said...

The problem is that when the Fed buys $1.25 billion in MBS its hard to figure out how much of that makes its way to the stock market. When Pfizer buys Wyeth using $45 billion in cash all the money ends up in the market.

Tsachy Mishal said...

Meant "trillion in MBS"

PJ said...

True - I've found investing devilishly hard the last months. It was easy to be long March through May, and I was sort of neutral till foreign markets turned over, but we've seen Shanghai peak in August, Korea in September, Hong Kong in October, US banks peaked in October, lots of internals suggesting the market ought to start turning over, and yet it has kept going up.

I think there's a lot of hedge funds / pros who trade on correlations and go out of bonds and into stocks based on relative performance/prices. So a lot of the Fed money has gone into stocks.