Disagreement in the VIX and Market Performance | Volatility and the VIX

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Disagreement in the VIX and Market Performance

Daily Options Wrap - September 8th 2008

The market had a very robust day to the upside on Monday and there was reason to believe that there are good things going on in the US corporate environment. However, the investor fear index was not as committed as stock index prices which means that today's rally may have been weaker than it first appeared. In today's video we will evaluate this disagreement and two of the biggest market events of the day from the options trader's perspective.

Fannie Mae, Freddie Mac and Big Brother
The two largest mortgage backers and resellers became part of the federal family today with a buyout by the US government. Shareholders in the two firms may be out of luck in the long term with both stocks losing more than 80% of their value following the announcement. It is uncertain whether or not the stocks will be available for trading on the NYSE tomorrow. The positive spin on this government land grab is that some outstanding risk has been "removed" from the equity market and shifted to tax payers. This will reduce some mortgage related uncertainty in the market and could help equities establish a bottom for prices in the near term.

Is this a good thing for banking stocks? Find out how to buy call options here.

Big Tobaccy and Chaw Team Up
Not since the "Legion of Doom" have we seen a merger that is likely to be more effective than the buyout of UST, makers of Skoal and Copenhagen smokeless tobacco products, by Altria Group (MO.) Mergers (evil or not) are usually good signs for the market. Because of the risk involved they indicate that management believes they will have access to the capital they need to be successful in the future. To do that, management will need a stronger market.

The question I am getting right now from investors is why UST is priced $.60 below the buyout price of $69.50. You can see this margin in the chart below. This margin is normal but be careful before buying UST expecting an easy %1 profits when the merger actually takes place. The difference between the selling price and the current price accounts for the risk that the deal will fall through. It would be very bad for UST longs if it were to happen.

In the video I discuss the advantages of selling a put against an uptrending market rather than buying a call. If you would like to know more about that, click here.

CST