Bill,

I think part of the equation for lower VIX is the SPX composition. Seven, eight years ago there were a lot of high octane four letter stocks moving the SPX. Names like JDSU, JNPR, YHOO, ORCL and plenty more all had caps bigger than $100 billion so that gave them a lot of weight in the SPX. Their very presence made the SPX more volatile. The SPX is much different now with those names having nowhere near the influence they once did. Just one man's opinion.

If you're truly interested in why the VIX has been so low and has remained low for a long time now the answers are pretty simple, and have been pretty well known for a while.

Over the last 6 years or so there has been a revolution in risk management due to the real time communications that's evolved. Where as recently as 4 or 5 years ago the firms that made markets in options had to cover all the pits on all the exchanges and manage those trades and traders individually. In this day and age “dispersion trading strategies� fueled by the ability to see trades made in the pit instantly at a globalize central risk management center as opposed to having to wait for the exchange to manually enter those trades into a system and then have them dumped into the firms system, allows risk managers to trade options in a sector vs. each other and ultimately spread them vs. the S and P. What naturally occurred then is that the large firms sell the SnP options vs. being buyers of individual options on the stocks in the SnP. This phenomenon originally began with pairs trading in the late 1990's and has evolved to the point where options on individual stocks are traded in a matrix vs. the sector indexes they make up and those sector index options are managed vs. the options on the broader indexes which in turn are all managed vs. each other.

The proof is simple, look at how few firms are left making markets in these options products on all 6 options exchanges. Where once firms like SIG needed people all over every floor to dominate the markets, they now do it with a fraction of the staff simply because of electronic access, global communications and global centralized risk management. There individual positions are all now managed in a matrix of like stocks and those matrixes are then managed vs. each other.

As far as the movement of capital off shore is concerned it has NOTHING to do with the original question posed about the VIX. Does it happen? Sure it many cases it does. No fund will be providing returns for its holders if they're stealing all the profits for themselves. They won't be around long doing that. It really appears they you're just having a rant about something that's not really going on to the degree you think.

Oh by the way the VIX was never intended as a technical indicator. LTCM went down because they were flat out wrong in their calculations. The Black Scholes model had flaws which surfaced which were specific to the exotic underlyings they were applying it to. That particular model is accurate enough for standardized equity options but its not been used in more complex options for a decade

Perhaps I was in error in my choice of words with rant. This was the first time I stumbled onto your site. My apologies…

I clicked a link from another blog that I find very very amusing, it's generally filled with poor opinions that the author tries to pass off as fact. In addition to that he fills it with many obviously phony trades. The all time caper is how he pumps himself up as being something he's clearly not, but enough with that silliness. I guess the anonymity of the internet makes him feel good.

Anyway:

I scanned your site briefly and enjoyed it. Having been in the options business for nearly 2 decades, working at a large investment bank in currency options, then on the floors as a market maker in equity based options products and now at the hedge fund level, I take issue with a lot of your commentary on options. But, unlike many of the blogs I read out there I respect your opinions and the hard work you put in to this one. Usually blogs are simply ego trips for people, filled with endless wrong facts and opinions based on nothing. I don't see that here, thanks for the hard work.

Just to open up a bit of dialog, options from the market makers standpoint are not a zero sum game with the end user. Since the market makers will lay off risk in the market of the underlying you can not separate and isolate the options market. For example, if you're retail customer A and you buy called from the market makers, they're going to buy the stock in a delta neutral ratio immediately after selling the calls to you. Therefore as the stock goes up and you have the opportunity to sell the calls for a profit the market makers will buy em back and take the profits on the stock they're long from shorting the calls. In addition all calls and puts are essentially the same thing to a market maker since he's going to hedge them with the stock. Therefore a long put plus long stock delta neutral is the same position as a long call short stock delta neutral to a market maker. So when he sells you that call and buys the stock the next trade that comes in for him may be retail customer B selling him some puts which he'd simply buy and then buy more stock, he's now hedged both directionally and hedges all the other variables in the price of that option. Mean while customer A my profit as the stock rallies and market makers have already locked in their profits. Also, don't forget that in this day and age the era of the “local� market maker who stands along and makes markets for himself in one pit is all but extinct. As I mentioned in my first comment the equity options markets are now dominated by huge firms who manage the risk in options on individual stocks vs. other options both index and individuals. They clearly don't care if retail customer A or B thinks he's competing directly against the individual markets maker.

Anyway just a bit of dialog about the many facets of options trading that the public does not know and has no need to know, unless they're interested in more sophisticated options trading. Bye the way I would agree that the majority of the public is poorly equipped to trade options successfully. One last comment concerning the myth of covered calls, in general the only market where they're truly a smart play is in a stagnant market, if and only if you can catch them when the implied volatilities have been high and the market stops in its tracks. In a falling market the covered call player gets brutalized (sorry to all those who claim they made money doing this in 2000 to 2002). In a rallying market more often then not you give up more potential profits then you make in selling you upside rights.

Thanks again for the dialog.

Why would they waste time with stealing money via hedge trades? If they were they devious they'd simply ship the money off shore and steal it that way. Sorry but I don't see that happening.

And how would you expect that manager to get that money back into the country for his use? I understand what you're saying but its not easy to produce returns on large caches of capital. I am really shocked that you would insinuate that this practice goes on. What about the integrity of the clearing firms who risk managers monitor the trades of the hedge funds?

Every profession known to man has its share of bad apples, personally I think it's a HUGE stretch to make these insinuations.

I am not arguing in any way shape or form that the market participants are lily white. I state clearly that there are bad apples in every profession. My point is that the scenario that you describe is difficult if not impossible to pull off. Being on the hedge fund side of the business the risks you describe would be a huge barrier and what would you then do with the capital you pilfered? Its so easy for the clearing firms to know affiliated parties are on both sides of a trade its just not a likely scenario. It's not exactly easy to bring it back in the country.

I guess I am just shocked that you give credence to that scenario. I guess we could sit here and write down all sorts of schemes and ways to pilfer investors but that would not mean they occur in the manor we write. I also, would not want paint such a gloomy picture without some substantial proof.

I guess we each have our own bones to pick with the dark side of business. I for one scoff at the scam “systems� that are marketed to naive retail investors. Things such as the “40% in 4 days� system and some of these other futures and options systems you see in the back of industry rags. Guys like Wade Cook give options a bad name too.

I have enjoyed the dialog thus far but we clearly have vastly different opinions on the integrity and the stability of the global capital markets.