Options Trade - CBOE Volatility Index (VIX)
Friday August 24, 2012

**OPTION TRADE: Buy the I:VIX Oct 2012 20.000 call (VIX121017C00020000) at or under $3.60, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $5.50.

by Ian Harvey

August 24, 2012

Introduction

The CBOE Volatility Index, or VIX, is available without fear or greed premiums, in an unusual moment for the so-called fear index.

Nimble investors can take advantage of an historical anomaly in the CBOE Market Volatility Index (VIX) that creates great opportunities for bulls and bears.

The fear gauge, as VIX is popularly known, was trending below 15. This means the bearish puts and bullish calls are available for purchase without a fear or greed premium. No one really knows how long this condition will last.

On Friday last week, VIX hovered around 14.50, a level widely interpreted as a sign investors have nary a care in the world about the risk of owning stocks, but yesterday it was at 15.96.

To put a sub-15 VIX into sharper perspective, consider that the index has closed below 15 less than 1% of the time in the past five years.

It is a favorite fact of pundits to note that VIX also was this low in mid-2007, just before the credit crisis began to roil stocks.

News Negativity

The negative news headlines and supposed fear have not let up this year. But, like early August and early July, the VOLATILITY S&P 500 (CHICAGOOPTIONS: ^VIX) is still hovering near yearly lows and not showing the fear that is being portrayed by the news. Something is being missed by the media, and the VIX is telling us what.

• “Did Wal-Mart (NYSE:WMT) Just Douse hopes for a Recovery” - August 16, 2012

• “Ford (NYSE:F) Europe Sales Fall as Economy Struggles” – August 16, 2012

• “Facebook (NASDAQ:FB) director Thiel sold 20 million shares after lockup” – August 20, 2012

Given the negative news environment -- which includes the scenarios that people are worried about -- the end of the European summer vacation, the U.S. election, and the looming fiscal cliff -- an expected sky-high VIX would not seem out of the question.

Continued News Voltility

To be sure, the next few weeks will be packed with market-moving events. On Friday, Aug. 31, Ben Bernanke, the Federal Reserve chairman, speaks in the morning at the Jackson Hole Economic Policy Symposium. On Saturday, Mario Draghi, the European Central Bank's president, speaks in the early afternoon.

On Monday, Sept. 3, European financial ministers meet to discuss Greece and Spain. On that same day, key Purchasing Managers Index data are released for Europe and China, and Tuesday brings similar data for the for U.S. The U.S. jobs report is released Friday, Sept. 7.

All the excitement culminates on Sept. 13, when the Federal Reserve's interest-rate setting committee concludes a two-day meeting.

Therefore, based on the facts above the following options trade is recommended…..

**OPTION TRADE: Buy the I:VIX Oct 2012 20.000 call (VIX121017C00020000) at or under $3.60, good for the day. Place a protective stop limit at $1.50 and a pre-determined sell at $5.50.



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