Thursday, October 16, 2008

Out of control: VIX is off the charts!

From Bloomberg, VIX Options Index Tops 80 for First Time as Stocks Extend Slump:
"The benchmark index for U.S. stock options exceeded 80 for the first time in its 18-year history, driven higher by equities extending the biggest slide since 1987 on concern the economy will continue deteriorating. Europe's volatility benchmarks also jumped to records.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, rose a third day, adding 9.6 percent to 75.92 at 12:50 p.m. in New York after climbing as high as 81.17. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, which fell 0.6 percent. The stock benchmark earlier slid as much as 4.6 percent, extending a 9 percent plunge yesterday.

``There's no historical context for the VIX at 80,'' said Dean Curnutt, president of Macro Risk Advisors LLC, a New York- based firm that advises institutional investors on derivatives strategy. ``Investors are scrambling for protection and it's driving up the price of options.''"
I'll tell you this, on the 6th of October, the VIX went 1-standard deviation away from its 60-day mean, and it has stayed 1-standard deviation away from the mean since then. Today, it traded above 80, and it will close just under 70. This is out-of-control volatility. Are investors still nervous? I say yes. Has confidence re-emerged from the TARP-related programs? That, my friends, has yet to be determined.

One thing is for sure: the market should have already priced in the slumping economic data. So this excess volatility must be centered on the uncertainty created by unprecedented government interventions taking place over the last few weeks.

Rebecca Wilder

2 comments:

  1. "One thing is for sure: the market should have already priced in the slumping economic data."

    DOW 500 points up in 1 1/2 hours doesn't seem like people are thinking seriously about a global recession, does it?

    I get the impression many people think of the credit crisis and recession as essentially one and the same. If governments can fix the credit crisis, the recession will halt in its tracks, home prices will start jumping, and gas prices will stay low.

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  2. Hi TH, First, thank you for reading and commenting!

    You said, "If governments can fix the credit crisis, the recession will halt in its tracks, home prices will start jumping, and gas prices will stay low."

    You are right: It is impossible to predict the length or severity of the recession without knowing the outcome of the Fed and Treasury's efforts to stabilize the banking system in the near term. I do believe that there is some momentum under this recession - it won't halt in its tracks - but the banking crisis will will at the least not exacerbate the recession if the banking sector is stabilized over the next (let's say) few weeks or so. If it lasts longer than that, let's say six months, then today's problems will eventually pass through to the real economy via a real credit crunch and more severe recession.

    Thanks again, Rebecca

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