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    MARKET EDGES

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Although this week the VIX fell to its lowest level since October, calm is not yet restored.

Volatility levels in the options market declined this holiday week with volume slowing to a trickle by Wednesday. Put/call ratios declined for the month of November in the aggregate with the index-option ratio remaining higher by an average margin of 27% --significantly lower that historical averages but still suggesting that investors with broad market exposure are continuing to hedge at these lower price levels.

Some of the major indications of declining volatility for the week were:

•On Wednesday the VIX closed at the lowest level since October 21, declining below its 50 day moving average.

•On Friday, realized 30 day volatility for the cash SPX declined below 71.5 for the first time since Oct. 17th.

•On Friday the VIX traded over 4% lower than its 50 day moving average while second month series VIX futures contracts (January 09) traded 13% lower --the lowest that the contract has trailed the VIX 50DMA since being introduced over four years ago. Other series traded at similar discounts. Clearly the futures market is pricing in declining volatility as we head into year end.

Despite all of this, volatility remains outside any historical corollaries and the options markets retain treacherous liquidity holes that leave plenty of room for short squeezes --this is not a time for amateurs to start selling naked volatility. Conversely, any volatility buyers need to be cognizant of the impact that suspended or decreased dividends will have on long-dated put contracts, while also remembering that the impact of time decay will be massively pronounced on short term contracts at these high vol. levels.

As we said last week, there are still phenomenal opportunities in this options markets for investors with the correct duration and fundamental conviction –it’s just important that they understand all the moving parts before wading in. Feel free to contact me with any question about derivative strategies at

Andrew Barber
Director