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Thursday, June 24, 2010

Volatility High. VIX>30, SPY IV 27

- Stock market is testing previous lows again. Due to terrible housing sales data, SPY has fallen below what I thought would be the lower level of the new trading range I set last week 108.4 - 115.3. But when I draw short-term trend lines, I see that 107 & 104.75 are next support levels.
- VIX has risen above 30 again and IV on the SPY has risen to 27. My model estimating future volatility trend, on the otherhand, has continued to decline. Not that this has not happened before over very short duration, but the way I read it, the market is pricing in high volatility (usually associated with the market falling rapidly, which assumes that SPY will fall below previous significant support level of 104.75 ), while my model is reflecting that whether the market rises or falls, the volatility of the movement would not be so high.
- Sovereign debt concerns in Europe are not new. The Euro vs Dollar has stabilized. Unless market is expecting really bad news from G20 or the financial reform bill or terrible US economic news next week, I would think that implied volatility in front month options are overvalued. I would look to see whether 107 or 104.75 support levels hold, then look to sell front month options next week. We shall see.

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