Head Fake, Or More Pain To Come?
Catch me if you've heard this one before. A global crisis emerges from some obscure country, and the VIX surges by some mind-boggling amount.
Such a scenario occurred the day after Thanksgiving, when concerns about a Dubai world default sent the VIX soaring some 25%. However, two weeks later, the VIX retreated back to its pre-Thanksgiving level of 21, as investors realized global Armageddon was not coming before Christmas.
We seem to be experiencing a similar phenomenon today, with the VIX jumping some 16% on worries Greece, Spain, and perhaps Portugal, could be on the verge of default.
No one knows what's going to happen to the so-called "PIGS," but if recent VIX action is any indication, these fears may be temporary.
"Every time we see these double-digit percentage spikes in the VIX, it's usually followed by some orderly decline in overall volatility," said Brian Stutland, President of Stutland Equities and, as a broker in VIX options, a fear merchant of the highest order.
In fact, since October 1st, each time the VIX sees a spike of more than 10%, it has fallen 15% over the next seven trading days. Case in point: last Friday, the VIX jumped to 25, only to touch 21 yesterday.
Still, with panic palpable in Europe, investors must ask: does the options market see more pain to come?
"I kind of feel like this time, the markets seem a little different," said Stutland.
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