Does the recent drop in the S&P 500 and the collapse in most things commodity have you ready to flee for the exits?
Relax and get ready for a summer of mellow vibes and calm seas. That's the message, more or less, of Randy Frederick, director of derivatives for Charles Schwab. While the recent baby spike in the S&P 500 volatility index, the VIX, spiked slightly toward the end of April, that's no reason to sweat, he says.
The derivatives expert views the VIX as a "trailing indicator," one that moves inversely to the market. Thus a spike in the VIX only tells you the state of things today. Not shockingly, the mood is relatively sedate.
As recently as April, the VIX was around 15, but it's currently closer to 17. For the sake of comparison, the VIX spiked briefly to 30 in March with the Japanese tsunami and went as high as 45 during the last correction in June of 2010.
Frederick says a far better indicator of the future direction of the market are the VIX futures. All is relatively well there, too, with the futures pricing in a slight increase in the longer-dated contracts. In other words, the options volatility is priced as it should be in a market where options players are expecting more or less flat action.
While Frederick's written work supports the idea of "sell in May," that seems to be more a function of not wanting to be bored to death rather than a means of missing a major pullback. In my experience, the options market isn't a perfect indicator of future sell-offs, but futures players tend to be smart money -- especially in the view of the futures players themselves.
With many options pros thinking 20 is the new 30 for the VIX, which has been sloping generally lower since the Lehman implosion of 2008 (not, it should be noted, at the market bottom in March of '09) the volatility levels are neither too hot nor too cold, but just right for folks looking to taking it easy during the summer months.
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