Headed for a "W"? Maybe not

6-July-2009

I was impressed that the market rallied at the end of the day today. The market direction has been slanting downward, many people are saying that a sell-off is coming, and last week ended with some fairly decent drops. Yet in spite of a scary fall-off first thing, the market did not panic. VIX levels (Fear Gauge) popped up some to reach over 30, but didn't exceed the level we had a few weeks ago while in the middle of a pretty strong bear run. Today's volume was a respectable 175M on SPY. If today is any indication we won't be in for a "W" bottom to this bear market--A "L" looks more likely.

For the first time in quite a while (maybe the last VIX options expiration), VIX climbed to exceed the July VIX future value (the true underlying of the VIX options). As a result the greeks on the VIX options were realistic (the VIX option greek calculations normally assume the VIX index is the underlying). For example the IV (Implied Volatility) of the 30 call was 87, much lower the 110 we had last Thursday, and the deep in the money calls show no significant premium as they should.