Are we still hearing crickets over in the TED spread trench? It is cutting new lows, lower than during the previous 2004-2007 bull rally.
European debt is apparently equal risk to US debt. The debt bubble is world-wide, and the banks are comfortable with it. Worldwide, governments are willing to take on more stimulus (debt) to seed growth.
Meanwhile in the equity markets, the Credit Suisse Fear Barometer (CSFB) is making monthly highs, as QQQQ, IWM, and SPY all reach for new year highs. The spread to 'protect' a portfolio is widening, meaning option writers are willing to take risk in exchange for higher premiums as the market touches and carves out new highs.
The higher premiums are for those afraid to risk, and let the index gains offset their portfolio protection. Similar to 6/2006-10/2006, the market could climb for another few months with spread premiums climbing on higher-highs, if implied volatility drops. A side-ways scenario is also being priced in, where butterfly strategies will likely be less profitable in the near term, since market movement has been both volatile and trending.
Pick your strategies wisely, the daily 10 point SPX swings are being priced in.
If implied volatility drops, and price drops, this is very bearish, since option writers are confirming the downtrend, risk premiums increase accordingly, and bearish spreads will likely shrink.
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