• 5 minutes 'No - Deal Brexit' vs 'Operation Fear' Globalist Pushback ... Impact to World Economies and Oil
  • 8 minutes China has *Already* Lost the Trade War. Meantime, the U.S. Might Sanction China’s Largest Oil Company
  • 12 minutes Will Uncle Sam Step Up and Cut Production
  • 20 mins China has invested btw $30 - $40 Billon in Canadian Oil Sands. Trump should put 10% tariffs on all Chinese oil exported into or thru U.S. in which Chinese companies have invested .
  • 16 hours Iran Is Winning Big In The Middle East
  • 3 hours Tit For Tat: China Strikes Back In Trade Dispute With U.S. With New Tariffs
  • 5 hours Trump vs. Xi Trade Battle, Running Commentary from Conservative Tree House
  • 3 hours It's Not the Job of the Government to Dictate Where Businesses Should Go
  • 18 hours Not The Onion: Vivienne Westwood Says Greta Thunberg Should Run the World
  • 14 hours Strong, the Strongest: Audi To Join Mercedes, BMW Development Alliance
  • 1 day Trump cancels Denmark visit amid spat over sale of Greenland
  • 17 hours IS ANOTHER MIDDLE EAST WAR REQUIRED TO BOLSTER THE OIL PRICE
  • 15 hours Wonders of US Shale: US Shale Benefits: The U.S. leads global petroleum and natural gas production with record growth in 2018
  • 1 day OPEC will consider all options. What options do they have ?
  • 10 hours Recession Jitters Are Rising. Is There Reason To Worry?
  • 33 mins US to Drown the World in Oil
Alt Text

Should Chevron Walk Away From The Anadarko Deal?

Chevron and Occidental are facing…

Alt Text

Venezuela Takes Unprecedented Action To Stabilize Currency

Venezuelan President Nicolas Maduro has…

Mad Hedge Fund Trader

Mad Hedge Fund Trader

John Thomas, The Mad Hedge Fund Trader is one of today's most successful Hedge Fund Managers and a 40 year veteran of the financial markets.…

More Info

Premium Content

Buying Straw Hats in the Dead of Winter

I am one of those demented people who buys flood insurance when the sun is shining and sun tan lotion by the gallon from Costco in the dead of winter. I am such an inveterate bargain hunter that I even buy Christmas ornaments during the January sales when retailers are unloading inventories for pennies on the dollar.

It is such instincts that drive me to take a look at the CBOE Volatility Index (VIX), a measure of the implied volatility of the S&P 500 stock index, which has been in a death spiral since it peaked nearly three years ago at the $80 level. You may know of this from the talking heads and beginners who call this the “Fear Index”.

For those of you who have a PhD in higher mathematics from MIT, the (VIX) is a weighted blend of prices for a range of options on the S&P 500 index. The formula uses a kernel-smoothed estimator that takes as inputs the current market prices for all out-of-the-money calls and puts for the front month and second month expirations. The (VIX) is the square root of the par variance swap rate for a 30 day term initiated today. To get into the pricing of the individual options, please go look up your handy dandy and ever useful Black-Scholes equation.

For the rest of you who do not possess PhD in higher mathematics from MIT, and maybe scored a 450 on your math SAT test, or who don’t know what an SAT test is, this is what you need to know. When the market goes up, the (VIX) goes down. When the market goes down, the (VIX) goes up. End of story.

The (VIX) is expressed in terms of the annualized movement in the S&P 500. So today’s (VIX) of $17.64 means that the market expects the market to move 5.01%, or 64 S&P 500 points, over the next 30 days (17.62/3.46 = 5.01%). It really doesn’t care which way.

It gets better. Futures contracts began trading on the (VIX) in 2004, and options on the futures since 2006. Since then, these instruments have provided a vital means through which hedge funds control risk in their portfolios, thus providing the “hedge” in hedge fund.

Now, erase the blackboard and start all over. Why should you care? If you buy the (VIX) here at $17.64, you are buying a derivative at a multiyear low at a technically oversold level. Buying (VIX) here is the equivalent of taking out an insurance policy on the long side of your portfolio. If you don’t want to sell you stocks in order to avoid capital gains taxes, you can insure yourself against losses through buying the (VIX) to match your portfolio. You can also use options strategies to create a cheap entry point and to limit your risk.

I am not saying you should rush out and buy this thing today. But you might tomorrow. We have gone up virtually in a straight line for five months now, taking the S&P 500 up 28%. A number of technical programs are giving “SELL” signals. The great New Year’s asset allocation, which I managed to grab hold of with both hands, is now done. An awful lot of people have crowded on to the same side of the boat, assuming that Ben Bernanke will keep printing money forever. Remember what happened to the Titanic?

By. Mad Hedge Fund Trader




Download The Free Oilprice App Today

Back to homepage


Leave a comment
  • Anonymous on January 26 2011 said:
    Contrarian-ism 101!As Buffet says: Be greedy when others are fearful, and fearful when others are greedy. I see a lot of complacence & greed out there right now. By the time everyone & their mothers in law are piling into the next big thing it's already all over - the smart money has quietly taken profits and left the room.

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play