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Today, I Bought VIX Puts

|Includes: Apple Inc. (AAPL)

Wow... What a day today in the market. For awhile, I have contemplated about whether or not I should buy call options on the VIX (Chicago Board Options Exchange Volatility Index) to hedge all of my long and call positions. Unfortunately, I did not make such a trade, however, today I went out and bought put options on the VIX and my reasoning is as follows.

In short, the VIX is a measure of volatility and fear/satisfaction in the market. For those who do not know what volatility is, think of it as being similar to a standard deviation, or statistically speaking, a dispersion of returns. When the VIX is below 20, the sentiment says investors are content, the markets are calmer, and there is not too much spookiness going on. I suggested that AAPL shareholders should buy put options on AAPL during its solid push forward, if not for my argument, because the protection was so cheap! Those who had done so around the time I wrote that article must be very happy with their decision to have done so. When the VIX trades above 30, the markets trade very volatile and investors become instilled with fear and ambiguity.

Now, the VIX over the past year has traded below 30 and stayed in the mid 20s then started to decline to the mid-upper teens when the DOW really started to break out in its movement above 11,000. Interestingly, the DOW went from a 52-week high of 11,258.01 on April 26 to close at 10,520.32 on May 6, a near 6.5% decline in only a few weeks. Intraday on May 6, the DOW crashed below the renowned 10,000 mark, more than a 10% decline from its 52-week high. Clearly, there are hiccups in the market and to the many analysts and commentators out there who had talked about a correction, well... here it is.

Investors should not forget the dozens of companies who have recently reported fantastic quarters accompanied with solid outlooks, the countless investors who are still waiting to jump back in the markets, and the numerous economic indicators that have been improving – the initial claims report on May 6 and construction spending to name a few.

I bought put options on the VIX because over the last few weeks, it soared from roughly 16 to just below 33 at the close on May 6! Now that might be a bit excessive. Intraday, it popped to 40.71, a fresh 52-week high. I do not think that the high VIX reading is warranted due to the fact that the economy has been improving, despite the debt crises overseas. From March 2, 2009 up until today, May 6, 2009, I averaged the VIX to be 26.30. I believe it is appropriate to assume the VIX will revisit its mean. If so, VIX put options could be a unique play. If the market heals its hiccups and ascends higher, VIX put options could be even a better play or at least a good hedge for those who do want to short the market.

Full Disclosure: Long VIX Puts at time of writing.

Disclosure: Long VIX Puts