VIX spikes above 30 showing increased fear in the market

Friday, March 14, 2008

The VIX broke above the 30 level this morning and is right around session highs as increased fear in the market (following news of a JPM/Fed financing for BSC) pushes the price of options (insurance) higher. The VIX is at highs now, +4.04 at 31.33 -- the highest level since 1/23 when the market set lows. The put/call ratio is elevated as well, at 1.42, indicating quite a bit more put trading than call trading... Options prices move higher in the face of uncertainty and fear, the same way an insurance co charges more for a 16-year old's car insurance than it does for a 35 year-old. Puts in particular get bid up as put buyers rush to the market to buy protection against further downside moves... The VIX and put/call ratios are viewed as contrarian indicators for the broader market, as panics typically happen at market bottoms and total complacency tends to occur at mkt tops. Before jumping to the conclusion that today's spike would indicate a bottom, we'd note that the VIX has made much larger spikes and higher highs than this in the recent past.