Week of April 26, 2010
Several times last year, this column criticized the SEC for sitting on their hands while the evidence in the Bernie Madoff Ponzi scheme was staring them right in the face. Well last week it was reported that internal investigation revealed that several SEC employees spent most of their days watching internet porn.
One senior attorney at the SEC spent an average of eight hours a day watching porn! That’s dedication. We would like to take this opportunity to apologize to the SEC. It was clearly not the Madoff case that was staring them in the face and they were probably not sitting on their hands.
From the perverse to the inverse, CST Options Director, Dan Keegan analyses an apparent inverse market relationship and how a trader might take advantage of it:
Traders often look at the relationship between market movement and market volatility. Take, for example the relationship between the Spiders, the exchange traded fund representing the S&P 500 Index (SPDR S&P 500 ETF, Public, NYSE:SPY) and the VIX, the index that measures the implied volatility of options on the S&P 500 Index (CBOE: VIX) In 33 of the last 44 trading days when SPY has gone up VIX has gone down and vice-versa, and on eleven trading days whichever way SPY went VIX went  the same way but often just barely. Lately there’s been a slight change in that predominantly inverse relationship. On April 26th, SPY opened up marginally at 121.85, while VIX opened up $0.90 at 17.52. The previous two trading days VIX went up as SPY went up, although not as radically. What should a trader do in this case? They can either “fade†the pop in the VIX and either sell SPY calls and puts or VIX calls and puts or they can buy VIX futures, options or SPY options. There is unlikely to be a 50% decrease in the VIX down to the $12 range. A 50% pop in the VIX up to the $27 range is very conceivable should any bad news come about. Almost all of the earnings news is positive, however. A skittish trader can buy the May 122.00 Straddle for 3.68. There are nearly four weeks left until expiration so there is time left for a move.
If you would like to have a better understanding of what Dan just explained, just take our course and Dan or one of our other mentors turn your computert into a center of activity and information. And we don’t mean that in a SEC type of way.
