Today the market was up and the VIX was down - a normal occurance. The VIX, a measure of market volatility, is typically inversely correlated to market direction. Periods of high volatility occur in declining markets - markets don't melt-up.

Today was the fifth day in a row, or every day this week, that the market increased. The DOW ended last week at 11955 and finished today at 12583. Conversely, the VIX fell each day this week, ending last week at 21.10 and closing today at 15.87.

While observing this toward the end of close, with the VIX at 15.39, I was inclined to buy some call options on the VIX. But having a rule that I don't invest in options unless I can calculate an edge, I pulled up my spreadsheet on closing VIX prices since 1990 to do some statistical analysis.

With a check of the option tables, I saw that I could buy a November 17 option for $5.20.

That means that sometime between now and November, the VIX must hit 22.20 for me to break even on that option. There are 94 trading days remaining until the November 15, 2011 expiry date.

I took my spreadsheet of daily closing prices and wrote the formula, where "B" is the column of prices:

=max(b2..b94)/ b1 -1

For every price point I looked forward across the range of 93 days-forward and found an average expected maximum price. Over 20-plus years that figure averages 42.8%.

Using my current price of 15.39, that resulted in a max price of 21.98. That would make the November 17 option worth 4.98 intrinsically - so paying $5.20 looked like a bad tradeoff.

However, since I'm buying the option for the reason that the VIX has fallen five successive days, I put that logic in the spreadsheet; only calculating the max value if the price had fallen five consecutive days. Interestingly, there were 70 times that occured in 20 years.

The result was 48.0%. That increased my max price expected from 21.98 to 22.77. That made the option's intrinsic value go from 4.98 to 5.77. Now a $5.20 entry price is looking at a 10% return; more if you consider that if it happens before expiry date, there will still be some time premium in the price of the option.

And with that analysis, I clicked a few keys in my Optionsxpress account and became the owner of 10 contracts.

There was still another hour left in the trading day, so I was anxious that my price may not be favorable. Recall that all my analysis was done on closing prices and I extended the price at 2:41 p.m. when it was 15.39. I was then lucky to have the VIX strengthen to 15.87 at the close. That means my analysis of 48% increase on closing price after 5 days of decline now calculated to 23.35, or an intrinsic option value of $6.35.

All of this analysis, with spreadsheets ready-to-go, takes less than 15 minutes. But it gives a nice documentated case as to why one should or should not take a position.