RF's Take on the S&P - Watch Implied Volatility

(click to enlarge - SSO Volatility Top, SPY Volatility Bottom)

When determining valuations on option prices (in short-term) it is important to look at the implied volatility (orange line) of the underlying asset. Over the past week, we have seen an increase in implied volatility for the S&P 500 but compared to the past. When valuing options, the higher the implied volatility, the higher the option value. It's rather interesting because I have been looking at certain out-of-the money calls on the SPY and SSO for later months in the year of 2009 and see that I can buy them for the same price today, than I could in early April, when the market was lower. What's even more interesting is that the implied volatility of the S&P today is higher by about 8-10% compared to those time periods. Odd, no? Well not really because I looked further out-of-the money about 45-50 days ago and time decay is part of the equation.

With that being said, it's rather interesting to see the put-to call ratio since early March, as well as the volume decline. To break it down in "easier" terms, when more puts are traded than calls, the ratio will exceed 1. This is also a good indicator of market sentiment. If the ratio is too low, the market may be seen as "overly bullish". The SSO (levered 2x long spy) shows that the ratio is 1. So, one could interpret that people are starting to buy more and buy protective puts on their positions OR speculators are betting on a drop in the S&P 500.

It is amazing how many economists and commentators believe we are going to retest the lows. In my view, I think they are nuts. I thought it March we might get to 650 but no lower and I covered all of my shorts at 740. When I saw the market shoot below 700 I was shocked. I went 70% long at 700 and kept 30% cash in case; hence, my "lucky" year. Frankly, I miss those times. I bought some great deals like AXP at $10 and FAS at $2.50 and the value is just not there. As mentioned earlier in the week, I believe the market will go way higher and soon. The big run will NOT be based on fundamentals but based on supply and demand. I believe many pension/mutual funds will be forced to put money to work because they will be moving out of Fixed Income and the benchmarks are eating their lunch. For the time being, I think this is a market where you can buy "high" and sell "higher". We might pullback on occasion but I believe fund managers will eat up the dip. Regardless, I am going against the concensus and the options markets, so it will make or break me. I think we still have a lot of problems, particularly our nation's debt and unemployment. However, if we hold, supply/demand will drive the market up and I believe that the S&P will hit 1050+ by Labor Day. I've been wrong before, but I will put my money where my mouth is, with my option plays (to be purchased soon).