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      04-03-2012, 02:38 AM   #799
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First day of second quarter: Spot VIX 15.64.

But:

15,000 VIX June 42.50 call options were purchased. VIX would need to increase 155% by June to collect on this bet.

As well,

30,000 VIX June 55 call options were purchased, too. VIX would need to increase 251% by June to collect any money on this bet.

It seems reasonable to see the June 42.50 calls, as we saw a peak of 44 VIX last October in a 22% decline. What's a bit out-of-place is seeing a large purchase of June 55 calls, since we haven't seen 55 since 2008 (-56% decline total, VIX 75-80). As a large purchaser looking to hedge against a drop, VIX 30 calls would be much more reasonable to purchase if only looking to hedge against a minor correction. Hedging against VIX 55 by June is confusing, as I'm not sure how anyone could make money off this large gamble.

Do remember that June is when Operation twist is finished, and 010' and 011' we saw double-digit declines after QE ended. This year, with it being an election year, large monetary easing is going to be highly politically taboo (should Bernanke take that into consideration). If politics doesn't deter Bernanke, then perhaps inflation and gas prices will, seeing as how another QE injection will take gas prices through the roof and bring the world into huge economic slowdown (similar to gas prices and the consequences in 2008). LTRO injection of $500 billion new liquidity Dec 19th saw gas roar 40-50% higher. Talks of a $1 trillion QE 3 would take gas to unprecendented levels as all of that liquidity will end up in equities and commodities (and not the economy, Money velocity is decelerating).

But Benny Ben may be tied-up like ECB Draghi with inflation, as the 2.6% inflation in Eurozone currently is holding back the ECB from printing anymore. They have a strict 2% mandate. If anything, they'll be taking money out of that system before they inject more. Germany won't all for inflation. If Ben injects more QE now, he will find himself in the same position as Draghi. It's funny because now QE has run into a wall, and introducing QE3 has large downside risk as well. This is what happens when you continue pumping liquidity, negative consequences begin emerging. I suspect this is why Ben keeps teasing the markets of more QE, instead of initiating more QE.

If this plays into my model well, no QE 3, this year would play into a decline larger than what we saw in 2010 and 2011. Letting the equities and commodity markets cool-off after a large decline would significantly lower gas prices, give a boost to the economy, and then allow ample room for QE to bring us back up, as well as not being politically interfering this year. It would also play into this baby-bull coming to an end, as it's had a 37 month run-up now from 2009 lows. And it is consistent to see mini-bull runs in Secular Bear markets die-off after 33 months. We're a bit overdue. And sitting pretty above 13,000 DOW and 1400 SPX while VIX is at 5-year lows signals NO ONE is hedging at the top.

Food for thought. And comment guys, you're all being so quiet these days

P.S. You all know the alternate scenario for if QE3 does happen, so I won't bother writing it. But just keep in mind that QE3 this time is not going to be as beneficial as previous QE's if it is released.
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