Thoughts on VIX and VXN

July 14, 2008

I just wrote my daily commentary over at my blog and included a blurb about the VIX and VXN. Here it is:

“VIX and VXN continue to be “low.” I had the opportunity to speak with an individual who had graciously share that some large institution was handling a large quantity of employee options. There is a debate if the VIX/VXN have sufficiently signal a bottom. Afterall, both have moved almost 100% off their May lows wouldn’t that show enough fear? One explanation that was given to me was the large, LARGE amount of employee options that had hit the market forcing this large institution to sell volitility (vol). What this creates, a low VIX and VXN. Therefore, if this large institution was selling vol than VIX and VXN have moved sufficiently because the indexes are “artificially” low. But, in my experience if a financial instrument are “artificially” low or high they tend to OVER correct on the other side. In this case, VIX and VXN aren’t sufficiently pricing in fear and will overshoot at some point. The bottom line, we haven’t seen our ultimate lows leading up to a new bull market and we should continue to wait patiently on the sidelines.”

I think it is important here to note that when anything is held down artificially it will over correct to the other side.

Best,

Market Speculator

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