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The Relativity of Fear in Options


Be afraid, but not as afraid as you were last time.

You probably don't need any statistics to tell you that fear is in the air and approaching panic levels as measured by the some option gauges. Many had wondered in past two days why, even as the SPX moved, the VIX seemed to be "lagging", in that it didn't make new relative highs. Well, today took care of that as the VIX has climbed 10% and stands at 28.80, which clips the peak of last Friday when the S&P 500 first cracked below the 1080 level.

In explaining the "lag" I like to use the analogy of a rollercoaster. The first drop is a doozy and your stomach goes into your mouth. Then the body becomes acclimated and the next dips can be taken more or less in stride. It takes a drop of greater proportion than the first time down to create that same sense of fear.

Likewise, the put/call readings have also now surpassed last Friday's readings. The equity only p/c stands at 0.85 and the p/c for index options is a 1.85, compared to 0.78 and 1.65, respectively, last Friday. In both cases this is the highest reading since last July.

Of course the question is, are these numbers indicative of a panic and therefore a washout, which translates into a buying opportunity. While the market could, and probably should, have a bounce early next week, I'm reluctant to say that this latest move represents the type of spike that accompanies a major bottom or turning point that often leaves a V-shaped bottom.

First, you have to consider where we're coming from, this sell-off is only about a week old and is just now approaching a 10% decline. Unlike a year ago when the S&P 500 was heading into the abyss, people had already been washed out and had little left to sell. So when the March turn came it was a tinderbox. This time around people actually might have some profits that they don't want to relinquish. That should create supply or the ability to sell the rallies.

Second, in terms of volatility and fear, while we're in a far different situation, I don't think it will recede as quickly as it has in the past few months. The past few days have reminded people of just how quickly and sour things can turn.

Be afraid, but not as afraid as you were last time.

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