VIX Climbs Past a Key Level, Signaling Trouble for Stocks
* On Monday June 15, 2009, 11:24 am EDT
The stock market's main fear gauge moved past a key level on Monday, indicating possible troubles ahead for the market.
And one options player with deep pockets is making a big bet that volatility will increase sharply, making this a tumultuous summer.
The Chicago Board Options Exchange Volatility Index, or VIX, moved past 30, a mark it hasn't closed above since June 4. A VIX (Chicago: VIX) reading of better than 30 generally indicates high volatility that usually accompanies stock market drops.
Following suit, stocks lost more than 1 percent.
The joint moves in the VIX and stocks come just a few days after a big investor bet on the VIX caused tremors in the options market.
One trader on Thursday bought 20,000 July VIX calls at the 45 strike and sold 55 strike calls for an overall premium of 42.5 cents in a trade that cost about $850,000 to execute. The net impact is that the VIX would have to beat the 45.42 level by the July expiration for the investor to make money. The VIX hasn't been past 40 since April 21.
"The last few weeks we've come under 30 and we've been under 30 as investors became more sanguine in their approach," said Andrew Wilkinson, senior strategist at Interactive Brokers. "This was a standout trade that went against the grain."
While there would be no direct correlation between such a huge trade and the actual VIX movement, the bet could be indicative of a shifting mood.
VIX options premiums have been generally drifting higher, with trading last week on July calls for a 35 in the index exceded open interest. Implied volatility on the index also has risen sharply, also suggesting higher moves in the index and tougher sledding for stocks.
The inverse relationship between the stock market and the VIX was in full effect Monday as stocks fell on a stronger dollar and news that
New York manufacturing activity had slowed more than expected in June
.
While some of the data points have been better than expected lately for the economy, the New York Fed reading was a reminder that the economy still faces pressure.
"I would say the market's way too sanguine. It's pricing in way too much of a recovery when we haven't got the growth to back it," Wilkinson said. "It's somebody pitting his wits against the rest of the market. My opinion is it will probably look good in a few weeks' time."
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