VIX is giving an indication contrary to the sentiment surveys. The VIX is high, which suggests an upcoming rally, whereas sentiment is high, suggesting we could be near a top.
The following story offers some interesting interpretation:
U.S. OPTIONS/VIX dips, signals turn mixed
CHICAGO, Jan 25 (Reuters) - The Market Volatility Index (^VIX - news), one gauge for anxiety in the market, dipped on Monday as the stock market recouped early losses and closed firmer.
The VIX, which measures implied volatility of several strikes on S&P 100 (^OEX - news) options, lost 1.18 points, or 3.6 percent, to end at 31.67, as the OEX climbed 5.68 points to 616.06.
''Volatility has come off, but it's still pretty high,'' said one index options trader. ''It sends the message that the level of fear on the part of market makers is fairly high, and that's bullish.''
Scott Fullman, chief options strategist with Swiss American Securities, said a break below the 30.00 level on the VIX would signal a stronger rally.
''High volatility levels have led to higher options premiums, increasing the returns for writing puts and calls,'' he said.
He advised that his clients, mostly foreign money mangers, write out-of-the-money calls on stocks they hold so as to increase returns and lower break-even points.
On the Chicago Board Options Exchange, the biggest options exchange, equity call volume continued to broadly outpace put volume 363,501 contracts to 150,854.
''It's very lopsided and it scares a lot of people, but it has been like that for a while and it can go on like that for a while,'' another trader said of the volume breakdown.
Jay Shartsis, director of option trading at R.F. Lafferty, noted that signals had turned mixed, with the CBOE put-call volume ratios in bearish ground and the CBOE index put-call ratio in bullish ground, for example.
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