Friday, July 28, 2017

Put Buying At VIX Lows Like Free Money, Well Not So Fast

News
Gundlach, a staunch bear that urged investors to aggressively short the S&P 500 in May around 2375, is 'doubling down' on his bearish bet around 2480. This bet that he described as free money ignores the tendency of stocks to run opposite of sentiment. Stocks tend to rally when the majority is pessimistic towards stocks. WASo = 0, a reading that defines neutral sentiment (neither optimistic or pessimistic), often precede decline/correction but not bear markets (chart). Bear market spawn from high levels of optimism, WASo > 1.

Buy puts that expire five months out is hardly a bet on the start of bear market.

Is Gundlach right about seasonal tendencies? I wouldn't follow his research. He's already short, thus, biased.

Chart


Headline: Gundlach's DoubleLine purchased five-month put options on S&P 500

NEW YORK (Reuters) - Jeffrey Gundlach's DoubleLine Capital purchased some five-month put options on the Standard & Poor's 500 Index a couple days ago as the CBOE Volatility Index .VIX fell to its lowest since December 1993.

"We lost money the first day we put on the trade, but now we are doing great. This is like free money," Gundlach, who is known on Wall Street as the Bond King, said in a telephone interview on Thursday. "We are in a seasonally weak period for stocks, but more importantly, we think the VIX was really, really low. So the S&P puts are going long volatility."


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