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To: Lucretius who wrote (256876)	8/20/2003 5:02:05 PM
From: KM	Respond to of 436258

This won't matter til it matters, but then it might matter a lot: Buzz and Banter Volatility Update VIX is scaping along its multi-year lows and there seems to no end in sight based on the market action. Even though VIX is up slightly today, this is due to some put buying in a few of the sub indexes. In individual equity options, I see nothing but option sellers. As the selling continues in individual equity options, it begins to spill over into index option pricing. As I have described, in my mind there are three basic phases to the supply for options that generates an overall decline in market volatility. The first phase involves over-writers, those investors that are long stock, comfortable with holding it, but selling out of the money options to generate income (a subset of this activity is put selling in lieu of stock buying). Some would say this is hedging activity that as a contrary indicator, means that there is more buying ahead. I have already stated that I look at it differently. Over-writing only hedges the downside for the amount of premium, probably 1-2%; then these participants are just long stock. It also does not foster short covering: when prices rise they either roll their options (although this creates some demand) or just let the stock get called away. The second phase of option selling involves volatility hedge funds and market makers, who seeing the supply of options and who begin to lose money being long options (volatility), begin to sell out their long gamma. This phase is somewhat like capitulation and leaves the market vulnerable as these leveraged players have no long gamma in place. The third phase is when the levered hedge funds and market makers sell volatility to open to make money. This leaves the market very levered and was the situation in 1987. My best guess is that we are at the end of the second phase and beginning the third. John Succo No positions in stocks mentioned. John Succo welcomes your comments and feedback at Succo@minyanville.com and invites you to check out his explanatory series on the basics of derivatives by clicking here. John Succo is the Chief Investment Officer and co-founder of a New York-based hedge fund concentrating in derivative strategies with approximately $175 million under management (the "Fund"). Prior to his current role, Mr. Succo was head of risk and a member of the investment allocation committee at Alpha Investment Management, a New York-based fund-of-funds. Prior to that, Mr. Succo was an options trader and head of derivatives at various Wall Street firms. Mr. Succo and the Fund may trade securities that are discussed on the site, both before and after the articles are published and/or may have a position in such securities. Mr. Succo will indicate whether he or the Fund has a position in stocks or other securities in any of the companies he discusses in an article but will not disclose the direction of the position. He will not disclose his or the Fund's ownership of any securities issued by companies that are not discussed in an article. The disclosures will be accurate as of the time of publication of an article and may change thereafter. This article reflects an analysis of market, sector or specific security trends or conditions by Mr. Succo and nothing contained in this article should be interpreted as or deemed to be a recommendation to any investor or category of investors to purchase, sell or hold any security. Any investment decisions must in all cases be made by the reader or by his or her investment adviser. Mr. Succo will not respond to requests for investment advice. Nothing contained in this article is intended as a solicitation for business of any kind or for investment in the Fund. Copyright 2003 Minyanville Publishing and Multimedia, Inc. All Rights Reserved. KM to mindless momentum chasers: ....................../´¯/) ....................,/¯../ .................../..../ ............./´¯/'...'/´¯¯`·¸ ........../'/.../..../......./¨¯........('(...´...´.... ¯~/'...') .........\.................'...../ ..........''...\.......... _.·´ ............\..............( ..............\.............\