Bracing for the Fall of 2010

- "VIX is now trading in the low 20s as the SPX has rallied over the past six weeks despite a slew of weak macroeconomic data. Despite this headline normalization, under the hood, derivatives markets remain stressed across various metrics like skew, correlation and term structure. Indeed, Barclays U.S. equity strategist team believes that the summer rally in U.S. equity is ending and that the next significant move is more likely to be a return to early July lows rather than to April highs." - "Given this state of affairs, in our view, a somewhat bearish stance is warranted over the next few months. However, since a moderate pull back appears to some extent already priced in, we believe an outright short position is not advisable and we think put-spreads are a better instrument of choice."- "While put-spreads on SPX are an obvious liquid alternative, in this report, we attempt to quantitatively determine if other assets offer a better risk reward. Specifically, we make an assumption that various equity ETFs will return to their lows, reached in May or June 2010. We then compare the returns for a put spread position in each underlying asset to its cost to determine which one offers the best payout ratio."

Barclays Index Volatility Weekly 20100809

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