The stock market’s fear gauge dropped on Wednesday to its lowest level since Lehman Brothers declared bankruptcy in the fall of 2008, flirting with an important benchmark that signifies growing stability and confidence in stocks.
Professional options traders, however, say the day’s move might be temporary. They point to signs that suggest investors are bracing for more volatility in the stock market, not less, in the weeks and months ahead.
The Chicago Board Options Exchange’s volatility index, or VIX, fell to 20.05 in the first hour of trading, the lowest intraday point since August 2008, before Lehman filed for bankruptcy and Bank of America announced plans to buy Merrill Lynch.
The VIX then rebounded as the session wore on, closing the day at 20.48, up a fraction of 1%.
The VIX tracks prices that investors are willing to pay to buy and sell options on the S&P 500-stock index, often to protect themselves against declines in the stock market. As such, the index tends to move down when stocks move up, and vice versa.
Some traders said Wednesday’s move represented a temporary dip, noting that futures on the VIX are trading considerably higher than where the VIX itself currently trades. December futures were trading above 22, for example, and January futures were well above 25.
“There seems to be some pent-up energy in the market,” said Matt Shapiro, a VIX trader for Stutland Equities. “And the futures are saying what while the market is not moving right now, it certainly could.”
Trading in VIX options appeared to reflect similar skepticism of the index’s current levels. Early in the day, one trader adopted a large one-by-two call spread in the index’s December options—buying December 27.50 calls and selling twice as many December 32.50 calls. Priced at just a few cents, the position starts to make money if the VIX rises above 27.55 before mid-December, and it works best if the VIX pops to 32.50.
The VIX hasn’t traded above 32.50 since July 8. A move to that level would represent a significant pop to the upside, fueled perhaps by an unforeseen piece of news or a dramatic jolt to the stock market.
But while some strategists said the market could start to bounce around a bit more, at least one strategist said the month of December could be rather uneventful.
If money managers spend the rest of the year trying to preserve gains generated in 2009, resisting any temptations to rock the boat or pursue dramatic changes, then the market could remain relatively flat, said Ben Londergan, co-chief executive of Group One Trading.
The near-term performance of stocks will also hinge on consumer-spending figures and retail-sales reports during the holidays, both of which could help shed light on the strength of the economy. “To the extent there aren’t any surprises there, I think you could see a slow month,” Mr. Londergan said.
