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<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Trying out the new listserver.</FONT></DIV>
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<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>The VIX would seem to indicate that OEX vols have come in to 12 month
lows - July 98 pre-20% correction levels.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2></FONT> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Is this really the case as reflected by OEX index
option prices?</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>The shoot-from-the-hip response to a low VIX is that the market is
complacent - and that a major move (unknown directional predictability) is about
to start.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>For example, the market tanked 20% from the low July 17-20 1998 VIX
readings.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>For example, the market launched a roughly 40% rally since the pre-X-mas
98 low VIX readings in this area.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>So while there is some anecdotal evidence to back the launch of a major
(multi-week trending) move from these VIX levels, </FONT> <FONT size=2>the
low VIX does not seem to be reflected in option prices compared to recent option
price behavior.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>For example, during the April-June 24 trading range action in the major
indices, I could get filled on near month 1 strike out call spreads
or put spreads for between $1.875 and $2 all day long, taking the offer on
the closer strike and hitting the bid on the away strike (ie, buying and selling
at the market).</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Since June 24's price action, most 5 point increment spreads have widened
to $2.875-$3.00 if I were to do these at the market.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Still, VIX keeps falling, the market's historical volatility ratios keep
making lower tracks, the prevailing price trend continues unabated.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>What gives?</FONT></DIV>
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<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>These strikes are close enough to price (eg if OEX = 733, the 735/740
call spread or the 730-725 put spread) that the volatility "smile" isn't majorly
impacted.</FONT></DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Not until I get to Last traded prices (not the bid-offers) on the 740-45
strikes does the price approzimate $2.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Maybe it is the way off-floor brokerages work, but all week last week I
was trying to get stuff done and the prices came back quoted 25%-32% implieds
(cox model), FAR above the VIX levels being reported,</FONT></DIV>
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<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>I am aware that vix "rolls forward" one month once we get into the last 8
days of the front month's expiration cycle.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>But floor quoted prices sure do not reflect what is
happening.</FONT></DIV>
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style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"> </DIV>
<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Any clarification would help. Maybe I got lucky in the Apr-June period -
but my vol numbers were matching VIX more or less with 1 or 2 rare exceptions (I
thin the Apr 29 40 handle bi-directional OEX move was a big one) - and even
generally speaking tends to agree with non equity-market experience of trading
ranges where implieds initially seem to expand before really coming in as price
continues churing inside the range.</FONT></DIV>
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<DIV
style="BORDER-LEFT: #000000 2px solid; MARGIN-LEFT: 5px; MARGIN-RIGHT: 0px; PADDING-LEFT: 5px; PADDING-RIGHT: 0px"><FONT
size=2>Thank you,</FONT></DIV>
<DIV
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<DIV
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size=2>Gitanshu</FONT></DIV>
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