Volatility? We're just getting started, options say
Boyd Erman, 07/07/08 at 2:20 PM EDT
This is going to sound strange on an afternoon when the SP/TSX Composite is taking another beating (down 331 points and counting) along with other global stock indexes, but the options market says that things haven't been all that volatile lately, though they will be soon.
That's the bad news. The good news is that as volatility climbs, it may signal a bottom in U.S. stocks, says strategist Rebecca Engmann Darst of Interactive Brokers Group LLC
She's watching the Chicago Board Options Exchange Volatility Index, well known as the VIX. The index is up big-time Monday afternoon, jumping almost 8 per cent to climb above 26 for the first time since March. The relative calm of the VIX "despite gathering economic headwinds and grinding losses for stocks" has "flummoxed and frustrated many market participants, who count spikes higher in the VIX for cues to capitulatory selling in the S&P that would signifiy a near-term bottom for stocks," Ms. Engmann Darst wrote in a note to investors.
The jump Monday now has some in the options market snapping up options to buy the VIX at 32.50 in July. For those calls to be in the money, given the 30-cent a contract price, would require another 20 per cent jump in the VIX in just eight days until the contract expires, the strategist notes.
If she's right, it's time to buckle your seat belts.