Fear, and maybe even some loathing of politicians, is increasingly evident in the financial market. The investor’s fear gauge, the Chicago Board Options Exchange’s Market Volatility Index (VIX), is trading in ways that suggests investors think stock prices will decline, and VIX will increase.
In an emblematic trade, an investor bought about 15,000 December 30 calls, a position that will increase in value should VIX remain elevated.
Last week, VIX had its second largest percentage drop for the year on Thursday, only to have its largest percentage increase (24%) on Friday. VIX ended the week above 30 for the first time since July 7.
These erratic VIX swings portend volatile stock trading. The erratic movements even have some investors questioning if the buy-the-dip trend is now broken. VIX was recently down just below 29. “It
contnues to feel like selling rallies is now in vogue while risk reduction remains the popular theme,” Jefferries’ derivatives straetgists advised clients Tuesday.
Hedging to preserve year-to-date gains, rather than looking for ways to make money, is emerging as the main theme in the options market. Take heed, stock investors.
– Steven Sears, Barrons.com options guru
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