This tells us something big is happening:
1. Mutual funds are just rotating cash out of stocks and into bonds and not hedging against their own selling = unusual.
2. Covered call mutual funds are selling massive quantities of call options against long positions and damping the price of . Market makers in options are so stuffed with long call positions that the only natural thing to do to free up capital is to sell short the underlying and that is putting pressure on prices of stocks.
The movement of VIX is usually extremely helpful in announcing to the market when enough hedges are in place to then steady a decline. I refer back to my previous posts in VIX to read other descriptions of this phenomena, so I don't have to re-type it again here. Essentially, people buy options when they are very and are shorting stocks and using the calls to hedge against losses. Also, bulls use call buying to leverage up on a perceived rally in prices.
There are many people who use the options markets to hedge risk and watching the price of insurance does give us an idea of when people are stepping up and paying the offered price on puts or calls. This time, however, is a bit more unique and it is telling us a story. If prices go down meaningfully from here, people will point to the low VIX reading as sign that people were not scared. If prices go up meaningfully from here, then people will point to the low VIX reading and say that it doesn't matter anymore and that the financial markets have so many different instruments in them to hedge with that it all neutralizes out.
If there is a signal that I can take a trade on, I will post it.
Tim 1:11PM EST 5/15/2014
How does VIX work and why is this important? I can best explain this by saying that VIX rises when people are BUYING options. Often, people buy options when they are protecting their portfolio from loss as that is viewed as "conservative" by the financial industry. Buying calls when you are bullish is considered "speculating" and is frowned upon. So, if the market begins to move dramatically down, then people fear they will lose more money and buy puts to protect their portfolio. The mere act of buying puts drives up the price of the volatility component of the option and it forces the person who sells you the put to sell short or sell their longs to generate cash to hedge the option. Hence, buying puts forces selling into the market. Therefore, a spike in VIX is really often-times a spike in selling. "