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Frank Hogelucht

Frank Hogelucht

Individual investor, trading for a living since 2007, taking a statistical approach in combination with historical market data and addicted to developing market-neutral algorithmic trading…

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Complacency at Multi-Month High

Besides the fact that even betting on a one-day decline (leave alone calling a top) has been a receipt for disaster during 2012 (so far), complacency has set in (again) among retail investors.

On Friday, January 20, the VXO (CBOE S&P 100® Volatility Index) closed at a 6-month low, and the (annualized) 10-day historical (realized) volatility is close to a 9-month low.

Whilst some blog authors and websites are suggesting to stay alert, or that a top might be in, a far better (compared to betting on a stock market top) opportunity might be presented due to the fact that for a couple of years now a bunch of (leveraged) Volatility ETFs are available to the retail investor (complementary to CBOE volatility futures and options).

Table I below shows the VXO (CBOE S&P 100® Volatility Index) performance (since 1986) one week later, at the end of January ('at month's end'), one month, two months and five months later in the event the VXO had not been this complacent over a 6-month period in January of a year (means the VXO had closed at a fresh 6-month low) in the past.

Volatility (realized and implied) almost always picked up shortly again (partly tremendously), and the VXO closed at a higher level one week later on 17 out of 18 occurrences, was up 1.0%+ at the end of January and one month later on all 18 occurrences, and higher 5 month later on 17 out of 18 occurrences as well.

Table I
VXO (CBOE S&P 100® Volatility Index) posted a 6-month low in January

Table II below shows the first occurrence (per year only). The VXO hit a 6-month low in January for the 10th time since 1986, and was always trading 10.0%+ above January's 6-month low at some time during the then following month.

Table II
VXO (CBOE S&P 100® Volatility Index) posted a 6-month low in January


January's 6-month low with respect to the VXO (CBOE S&P 100® Volatility Index) might provide a favorable opportunity betting on implied (and historical) volatility picking up (possibly tremendously) over the course of the next couple of weeks and months.

Have a profitable week,


Disclosure: No position in the securities mentioned in this post at time of writing.


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