Many technical analysts were alarmed yesterday because the VIX closed at 30.81.
Why the concern?
Because over 30 is currently considered a reading that has been associated with past stock market drops.
One day does not make a trend, so more than one day would be required to confirm a trend change.
At the same time, the S&P 500 dropped yesterday, but it still held its trend line. So while risk levels increased yesterday, a correction will need more market data for any kind of confirmation.
Sometimes, there is anecdotal information that puts a scare into investors. One such example is yesterday's rumor about the VIX trader who spent $850,000 on a trade.
The rumor yesterday, was that there was a trader who bought 20,000 July VIX calls at the 45 strike and sold 55 strike calls for an overall premium of 42.5 cents in a trade that cost about $850,000 to execute. The net impact is that the VIX would have to beat the 45.42 level by the July expiration for the investor to make money. The VIX hasn't been past 40 since April 21.
If every investor believed this rumor, they would be selling out or shorting the market right now. So, the question is whether the rumor is true or not ... and if it was true, was this a professional investor or just a fool with too much money?
________________________________
Well ... let's consider some of the facts. There are only 21 trading days left until the July expirations. That is a very short period of time for a 33% increase in the VIX to occur at this stage of the market.
It could happen, but the big question is "why would someone place such a huge a bet if they would actually have to see the VIX higher than 45.42 to MAKE any money?" Wouldn't someone with that much money have 20 other better investment possibilities?
Such rumors or comments can often bear a resemblance to the "pump and dump" rumors that are against regulations. The SEC should investigate such rumors with the same fervor as if it were a rumor about an individual stock. I hope they at least look into it.
stocktiming.com |
