The VIX is a measure of near term volatility of the S&P 500 index.  I got my hands on as much data as I could get my hands on, and manged to come up with this chart:

VIX History click for larger version

Now, it must be kept in mind that the method for calculating the index was changed in 2004.  The new method expanded the basket of stocks to the entire S&P 500 instead of the S&P 100, the Black Scholes option pricing model was bounced for a proprietary formula, and more options were included instead of just those at-the-money.  If you want all the meat, there is a very detailed white paper on the CBOE website.

The thrown about name for the VIX is the 'fear index', as it measures the implied volatility across options trading on equities.  When the implied volatility is high, it means that option writers want a lot of money for their contracts, as no one is certain where the market is going.  Normally, anything below the 15 level is complaicent and anything above 30 is considered volatile.  There has been a couple of times previous to 2008 when the index poked above 45: Sept 28th in 1998, Oct 8th in 1998 and Aug 5th in 2002.

So far, 2008 has had the index close above 45 level 14 times this year.  If the VIX is a fear index, then people are scared shitless.  Heading into the end of option expiration week, the volatility index spent the entire 5 days above the 50 level, which is territory only found in 2008.  It closed above 70, at 70.33 on Friday for a new all time high.

The volatility can been seen in more than the VIX.  Average True Range for SPDRs over the last nine trading sessions is $9.15.  Considering it closed today at $98.81 the average trading range is approximately 9% of the current price, daily!

For us, that means that options are priced incredibly expensive right now.  Have a look at the put and call premiums for the front month:

Put Premium:

SPY put call premiumclick for larger version

Call Premium

SPY put call premiumclick for larger version

An at the money straddle would cost between 10.80 and 10.98 depending on if you went with the 98 or the 99 strike (using the last price of the day).  Not unfeasible considering activity as of late, but it makes it very difficult to turn a profit buying these contracts.  Recent market activity makes it dangerous to sell these contracts.

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