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- Look at the volatility index (VIX) for signs of concern in the US market
- The role of put options in hedging equity risk
- Indecision seen of late in the daily chart
The role of put options in hedging equity risk
The VIX index will move up and down on both increases and decreases in range expansion, but also on the cost to buy put options on the S&P 500. When traders feel there is stress in the world they will naturally either sell out of equity positions or hedge these portfolio holdings by buying put options on the underlying company. Continued buying of options pushes up the premium, thus in turn causing the VIX to move higher.
Indecision seen of late in the daily chart
You can naturally see this occurring of late in the volatility index (I have used the November contract), where traders have looked to hedge equity positions using put options, thus the index has spiked above the August high of 18.88. Overnight (the index trades between 23:00 and 07:15 AEDT) actually fell below this pivot and indecision has been seen on the daily chart.
A pullback could be on the cards, although strong support should be seen at the former June downtrend, just above 17.0. The daily stochastic is at overbought readings, so we would caution about strong upside from here.
Naturally the course of the index will be dictated to by the perception of a default in the US and from all accounts we are modestly closer to a resolution, with talk House Republicans and Senate Democrats are weighing up a short-term increase in the debt ceiling to avoid a default. There is still much work before we see full agreement, thus I can’t get overtly bearish on this index at present.
Still, this is a really interesting index that traders can look at and it gives a good impression on the perception of fear and concern in the market around the US debt drama and other macro issues.