So, what are the implications of the VIX's recent plunge? Well, the SPX responded by soaring 1.54% on Tuesday, but a study by Schaeffer's Quantitative Analyst Chris Prybal suggests that the market could be in for a pretty decent run higher. In fact, as you can see in the table below, the SPX averages a 42-day return of nearly 4% in the wake of a seven-session VIX losing streak. Chris also notes that we have seen 10 such downtrends in the VIX since 1990, and all but one (December 2004's reading) have resulted in positive market returns following a 42-day period.
The VIX gapped lower Thursday on confidence about a deal in the euro zone, but some traders don't believe the message and fear that any decrease in volatility may be temporary.The Chicago Board Options Exchange (CBOE) market volatility index or, VIX [VIX 25.46 -4.40 (-14.74%) ] closed at 29.85 on Wednesday 11/26 and opened Thursday’s session at 24.72, down over 17 percent. At the same time, stocks surged, with the S&P 500 up nearly 3 percent at midday.While the drop in the VIX, the market's fear gauge, indicates that some investors are becoming more complacent, others see this sharp drop as an opportunity to make money.“Equity market is ahead of itself”, says Alex Panagiotidis, Options Analyst at Sterne, Agee & Leach. “The world is not saved with this meeting—a fifty-percent haircut (on Greek debt) is not enough, there are not enough details”. Panagiotidis sees this as an opportunity to buy options including, short-term protection on the downside, especially in ETFs.Relative to realized volatility, Panagiotidis says iShares Russell 2000 [IWM 76.38 3.79 (+5.22%) ] options expiring in November are “cheap”.Five to 90 day realized volatility he says is roughly 38 to 50 percent while at-the-money options are trading with an implied volatility near 32 percent.Panagiotidis anticipates that the gap between realized and implied volatility will narrow, offering a short-term trading opportunity for investors.In other activity, Cree [CREE 27.70 2.39 (+9.44%) ] was added to the list of weekly options offered by the CBOE.Hendi Susanto, Gabelli & Company analyst rates the stock a “buy” and does not anticipate any “particular event” that might spark volatility in the stock price. The company reports its quarterly earnings November, 18th.And trading in options on shares of Electronic Arts [ERTS 24.50 0.11 (+0.45%) ] is unusually active. According to data provided by Interactive Brokers, volume traded is above its 10-day moving average, trading nearly 74-thousand contracts at mid-day.The company reports its quarterly earnings Thursday, after the bell and is expected to report a loss of four cents on revenue of 967-million for its second quarter, according to Thomson Financial.
