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VIX Options Signal a Buying Opportunity in Stocks

Michelle Rama |Producer, CNBC
Friday, 11 Mar 2011 | 11:11 AM ET
Picturegarden | The Image Bank | Getty Images

Fear in the markets is palpable.

Reports of unrest in Saudi Arabia, and the devastation caused by Japan's massive earthquakehaving many thinking the global economic recovery could be at risk.

But options activity in the VIX , which many call the fear index, isn't painting this grim a picture.

In fact, each time the S&P has touched 1,296 in the last 10 trading days, the VIX has made lower highs, said Brian Stutland, Stutland Equities President. This reaction in the VIX options to stock declines is exemplified even more today, Stutland noted, the day when Japan suffered its strongest earthquake in 300 years, setting off a 10-meter tsunami on its coastline.

Market fears of escalating violence in Saudi Arabia were especially pointed ahead of its "Day of Rage" planned for today. Yet the VIX failed to surge by as much as in previous sell-offs Thursday, indicating that options traders may see these events as short-term hurdle to long-term economic recovery.

"It seems like the smart paper's taking off hedges," said Stutland, an Options Action contributor. He added that the VIX could go above 23, but "we would have to see major political unrest in Saudi Arabia for that to happen."

Not only are options activity indicating further downside is unlikely, but strategists say Thursday's dip may be a chance to get into stocks.

"The VIX is trading within its normal range," said Oppenheimer Chief Options Strategist Michael Schwartz. "In the last month or so it's been a one-day event, and they've been more of a buying opportunity than a panic opportunity."

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VIX
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