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Worried about this market? Today’s rally aside, you’re not alone. Big market players are purchasing huge piles of protection — So much so, in fact, that stock market “insurance” is now more expensive than at any time in the last nine years!
That’s the conclusion of this fascinating Bloomberg story I came across today. Its findings stem from research into the relative price of options on the CBOE VIX index.
A little background first, in case you’re not familiar with how the options market works: Options allow you to speculate on the direction of an index, stock, ETF or other asset. They give you the right, but not the obligation, to buy or sell a given underlying investment. That right changes in value along with the value of the investment.
More specifically, “call” options are bets on an increase in the underlying investment. “Put” options are bets on a decline. Calls appreciate in value if the underlying investment surges, while puts climb in value if the underlying investment tanks.
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| Is it time to buy put options to protect yourself against market declines? |
With that in mind, Bloomberg dug into the relative price and volume of calls and puts on the VIX. Turns out investors have snapped up around 5.9 million VIX calls versus only 2 million puts. The cost of calls is far outpacing the cost of puts, too – with calls the most expensive relative to puts than at any time since July 2006.
You probably know that volatility and the VIX index tend to surge when stocks tank. So the fact everyone and his sister is placing huge bets on a rise in volatility means they’re basically betting on a big drop in the S&P 500.
So should you join them? Does the fact everyone is buying protection mean the “smart money” knows the bull market is toast? Or is this a contrary indicator, a sign that sentiment is so bearish, stocks have nowhere to go but up?
Well, if you look back at July 2006, you’ll see that stocks rallied in the wake of all that summer’s put buying. The Dow Jones Industrial Average climbed from around 11,000 to as high as 14,000 a year later. But that was the bull market’s “last gasp.” You probably remember how much it crashed thereafter in 2008 and 2009.
| “There are plenty of yellow warning signs out there.” |
This time around, there are plenty of yellow warning signs out there. The collapse in emerging markets. The sharp declines in commodities. The increasing struggles we’re seeing in many industry sectors this year, as opposed to last year when the weakness was concentrated in energy.
And it’s pretty amazing that despite all those problems, volatility itself is still very cheap. The VIX index closed today at around 12.2 – a pittance compared with levels it hit in past crises.
I’m not even talking about the sky-high 96 reading we saw in the Great Recession. I’m talking about much smaller spike levels – like the 47 or so we got during the debt ceiling debate in 2011 or even the 20-25 readings we saw in late 2014/early-2015 as energy and emerging markets suffered their first bout of weakness.
So maybe, just maybe, those insurance buyers are on to something. Maybe they can see the writing on the wall, and are prudently reaching for investments that will dull the pain of a decline.
That’s my take anyway. Now I want to hear yours. Do you think volatility is going to keep rising, and the U.S. stock market is going to hit the skids? Or are too many people betting on a decline, and therefore we’re about to see one heck of a rally?
What fundamental development(s) do you think could set off the next big collapse or surge? Definitely let me know what you’re thinking on this important topic at the website.
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What’s going on in the economy, and how will the Federal Reserve react? How did the various Republican candidates fare in the most recent debate, and what does that say about where this country is headed? Those are the main topics you were discussing over at the website this weekend.
Reader Bob T. said the Fed can’t afford to raise rates unless the rest of the world is on board too. His take: “No one at the Fed seems to understand that increasing rates when the rest of the world is holding or reducing will result in an even-higher dollar. That will negatively impact exports and U.S. dollar denominated profits from international sales.”
Reader Charles also said the Fed can’t afford to raise rates because the economy isn’t in as good shape as some think. His view:
“I see economic weakness everywhere. Wait ’til the auto sales crash. They have been selling to weak purchasers with electronic disabling devices installed that will enable the lender to render the car undrivable so they can repossess the car when the purchaser defaults. Shades of another bubble.”
Finally, Reader Kirk W. said: “They are truly between a rock and a hard place and that will only hasten the coming chaos! They often ‘play’ with the jobs numbers, and I wouldn’t be surprised to see that number adjusted downward.
“We now have 93.8 million people not in the workforce, with the actual unemployment rate at 23.1%. Raising rates will be a ‘good’ thing for our economy – especially with a national debt nearing 19 trillion?”
Meanwhile, Reader Reality99r took note of which candidates seemed to “win” the debate, and said there was a message there. The comments: “The non-politicians — Trump, Carson, and Fiorino — prevailed. They have obviously tapped into some sort of primordial survival instinct to help deter the decline of our country. Pragmatic bottom line business minds just may be the panacea. Let common sense prevail rather than political correctness.”
But Reader Ted. F. said the field is still too crowded with candidates who don’t have a chance, so paying too much attention now isn’t worth the effort. His observations:
“It sounds, with so many people, more like a circus, a gathering of clowns. Watching the clothes go round in the dryer is likely more interesting.
“When most of the candidates wake up, look in the mirror, and realize they have not even got an ice cube’s chance in Hell and quit, then maybe there could be a serious debate on real issues. Until then, why bother?”
Is Ted on point with regard to the overcrowded field at this point? Is Kirk correct when he says the economy is hurting more than investors realize? Let me know over at the website.
Personally, I believe the persistent, ongoing lack of substantial wage gains is a key problem for the U.S. economy. But I also don’t believe 0%, crisis-era interest rates make sense any more, and that the Fed is a lot closer to starting to take them away than many investors realize. We will see.
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Precision Castparts (PCP) has been a stock market laggard for months on end. Not today. The shares surged after Warren Buffett’s Berkshire Hathaway (BRK/A) agreed to buy the metal parts manufacturing firm for $37.2 billion. The price represented a premium of around 21% to where PCP shares closed on Friday.
Here come the lawsuits. Several industry groups and states are planning to file legal challenges soon against President Obama’s new power industry regulations. They’ll argue the Environmental Protection Agency overstepped its bounds when it rolled out its new climate change initiatives.
With U.S. oil production booming, many are questioning why the heck we still have a national ban on exporting crude in most circumstances. The ban dates back to the 1970s-era Arab oil embargo. But with global and domestic oil prices depressed, the energy industry is pushing hard to have the limits lifted – and Congress may finally be ready to act in the next few months. We’ll see if momentum builds for the effort.
Violence continues to bubble up in Turkey amid that country’s increased role in fighting ISIS across its southern border. The American consulate came under fire from two gunmen, while a bombing at an Istanbul police station killed one officer and wounded 10 other people. The iShares MSCI Turkey ETF (TUR) has been one of the worst emerging market investments, given pressure on the economy and currency there.
So what are your thoughts? Did the EPA go too far? Should oil exports be permitted? Is Warren Buffett’s latest move a smart one? Let me and your fellow investors know over at the website.
Until next time,
Mike Larson
Mike Larson graduated from Boston University with a B.S. degree in Journalism and a B.A. degree in English in 1998, and went to work for Bankrate.com. There, he learned the mortgage and interest rates markets inside and out. Mike then joined Weiss Research in 2001. He is the editor of Safe Money Report. He is often quoted by the Washington Post, Reuters, Dow Jones Newswires, Orlando Sentinel, Palm Beach Post and Sun-Sentinel, and he has appeared on CNN, Bloomberg Television and CNBC.
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I’m the worlds second worst gambler but if I had to bet, I’d bet on a crash. This market is built on worthless paper and to worthless paper it shall return.
Responding to your questions: 1. EPA continues to overstep their authority. Overall goal of the Obama administration is to eliminate the coal industry. Over regulating it into non-existence; Ayn Rand, “Atlas Shrugged” explains the plan in full.
2. Yes The US should export crude and hopefully compressed gas to countries in need for them to grow. Help our exports and oil/gas industry as a whole.
3. As to Buffet; he thinks it is a good idea and folds into his conglomerate business structure. thanks
I don’t remember getting to vote on whether or not we destroy the coal industry. If the politician of the moment can destroy an entire industry, what’s to stop the next one from destroying your’s or mine’s industry. I don’t think people realize what a slippery slope we are on. Jim
I’ll refrain from partisan comments on the proposed EPA rules and simply ask a question. Doesn’t it seem to you that we are getting an awful lot of far reaching rules and regulations that profoundly effect our lives without “We the People” having anything to say about it? No debate, no peoples representatives. Here it is, take it and like it. What happened to the legislative process? Jim
Congress has the power to reign in the EPA. I do not understand what they are waiting for. The latest EPA regulations demonstrate the rule of diminishing returns. To get to 90% reduction in greenhouse gases was relatively easy and cost justified. To get 95% or higher reductions are cost prohibitive and will drive the cost of electricity up which will really hurt our economy and place an undue burden on poorer Americans.
Hi Keith,
Whatever rights are available to Congress, they need the will and desire to act.
Are you sure that the Prez does not have the right to Veto such action by Congress
and does Congress have the stones to cut funding to the EPA ?
They have not had the will to cut funding to anything for fear of being blamed for a Government Shutdown.
Greenhouse Gasses are such a red herring and are being vilified for being a cause of global warming, when the human component of this tiny percentage is being played
by the proponents as if it were the end-all in the “Settled Science”
It is so lucrative to be supporter of the Co2 boogey man, that businesses who
agree to reductions get government grants for doing so.
Schools get more grants for coming up with supporting studies..
Grad Students get recognition for supporting the Consensus of Anthropogenic
Global Warming, even when NASA has a satellite study which shows the global temperatures are lower than normal for the last two decades…..
No wonder it is renamed “Climate Change” in recent years!
Co2 is a plant growth requirement…. If we were able to cut the levels in any big way,
there would be starvation as plants (CROPS) would yield less for the world to eat.
If Co2 is such a bad thing, why did much higher levels exist at the time of Dinosaurs?
Why did those higher levels not run away and cause the Earth to become another
Venus? We are told that we are getting close to the point of no-return if we do not act
to reduce emissions.
All of this is driven by computer models and not by actual real world results..
The East Anglia University emails exposed that the readings taken at ground stations
were massaged to get the runaway Hockey Stick Graph.. This is still happening.
Ground measurement stations are often showing higher temps due to encroachment
of Urban development, paved areas, air conditioners, fewer trees in the area all
affect the air temperature around these “remote” metering stations.
Ethanol production also causes the Co2 levels to increase because
fuel has to be burned to produce it.. Then when you use ethanol,
your vehicle suffers from a decrease in miles driven and a shortened
engine life due to the moisture content.
I won’t post any links about this…
Just do a Yahoo or other search for “Al Gore Lied” and see what comes
back..
Regards..
Ron
It seems now is the time to concentrate on our US economy rather than trying to kill the remaining jobs in the coal industry, still the cheapest energy solution, to “reduce” CO2 which is still unproven as the cause of climate change.
It seems now is the time to concentrate on our US economy rather than trying to kill the remaining jobs in the coal industry, still the cheapest energy solution, to “reduce” CO2 which is still unproven as the cause of climate change.
No we shouldn’t allow any oil to be exported until we no longer import any oil into America. After all we still give some $ 4 billion in tax breaks to American oil companies.
So let’s take care of Americans first instead of oil billionaires who want to pump America dry and worry later if there is any American oil reserves left for Americans.
The problem is a lack of new refineries. Over the years we have become hooked on Saudi and Venezuelan heavy sour crude and that’s what our current ones are configured for. As a practical matter we cannot build new ones or reconfigure the old ones. All our new oil is highly desirable light sweet with no place to go. We will soon reach storage capacity and you may see the entire energy renaissance come to a halt. The heavy stuff is also cheaper. We can export the expensive stuff and continue to import the cheap stuff. A win-win.
I don’t really understand why refineries set up to process heavy oil can’t also process light oil. They would seemingly just need less heat to drive off lighter components which would be processed into desirable light products, gasoline, jet fuel, etc. They would just produce less of the heavier oils, bitumen, and such. Can you explain this, Jim?
No, Just going by what I’m told by people who ought to know. I suspect the age of our plants has a lot to do with it. Jim
Then shouldn’t those who control such things be promoting new plants that would be more efficient and perhaps process fuels, etc., more cleanly and cheaply, rather than hindering them? I’m sure the oil companies would be willing to periodically replace the older refineries in order to improve their bottom lines. I guess the bureaucrats like pulling the strings of power though.
In a word, yes, you are right.
In a way I’m with Mr. Right in that it seems silly to export oil when we produce 10 million barrels and consume 17 million. I usually get the lecture about how its a world market and it doesn’t matter where a particular barrel of oil comes from. As far as the US running out, I really don’t think that’s a problem. In way that’s up to The Greens. Jim
It seems sillier to IMPORT crude because we can’t process what we produce in our old plants.
Distillation of crude oil is a process which boils off various ingredients, chemicals, within the crude. All those ingredients have different boiling points with respect to other ingredients. Just because you have a column which does the distillation or boiling doesn’t mean it works perfectly for every crude. Separation of the different constituents of various crude requires different equipment to handle these different constituents, chemicals, within each crude.
In other words crudes are composed of different “liquids” and they require different distillation columns to separate these different liquids/solids/gases. This is due to the boiling points of the constituents of the crude in relation to the rest of chemicals in a particular crude. A similar comparison exists between burnable gases, some are liquified gas at one temperature and pressure while others are liquids at that same temperature and pressure. There are a lot of different flammable chemicals out there and they are all handled differently with respect to separating these chemicals.
You are one of the few people I have seen that actually recognizes and understandsthe problem with sour and sweet crude. Our congress needs to get on the stick and change an outdated law so we can export our crude. It would be a win-win.
The not so funny thing about Congress is that the liberals who so want to “provide for the poor” are the same ones who are stopping shipping products and letting others in the world decide whether or not the products are good for themselves (like the poor of other countries getting better energy deals).
Bottom line is that Congress has no idea how to run an economy and its messing has created the problems we face.
I do not understand why anyone thinks that there still is a vote..
The truth is right in front of you. CONgress has over a 90% Disapproval rating with a +90% REELECTION record ?? Also remember the black out that RON Paul received
from the last group of criminals at the republicans primaries.
All you will end up with is two white washed pre picked no choices .
My guess it will be killery verses bush both elite picks.
Mike: It is about time these so called geneses in Washington woke up. Exporting oil to Japan who has no natural resources will bring down supply and may cause WTI to rise. We should also bear in mind that Saudi Arabia will not cut production because they are out to put our frackers out of business. They feel betrayed due to our change in policy towards Iran. Regards, Robert Calabro.
It is good that the Saudis are making less from their oil. It may give them less money to support ISIS, al Qaida (most of who’s members were Saudis), the Taliban and others who basically believe in their strict Wahabi branch of Islam, which promotes death by stoning or beheading for infidels and such. Not to mention seclusion of women, who are, at best, treated benevolently so long as they obey their restrictions and regularly produce new sons for their masters.
“Puts” and “calls” are good protection for those who know what they are doing, but what kind of protection should the “small guy” be buying?
Mike v silver
buy coins. average down from.$15-10 oz. dont sweat if it goes to $7. mean reversion is $10-15.
without shtf gold around $1000 and silvet around $15 for 20 years is a stable currency.
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lighten up or short a weaker stock in sector long tmobile shory sprint. long gld short gdx. buying options only works if price moves before time expires.
Violence continues to bubble up
in
Ferguson Missouri
all cops should wear body cams and so should you. decent cam dvr is under $500 so is a new glock. learn to shoot and learn the law. dont be a victim and dont be a vigilante.
they should not allow oil exports until all oil imports are stopped. or till they ok the xl pipeline.
They want it; we have it. How in the world is not making delivery going to hurt America?
CORRECTION! How is MAKING delivery going to hurt America? (Sorry about that.)
negative stock options are indicative of a short term seasonal correction in sep oct. edelson’s view is probably accurate. after the fall correction flight capital from faltering eurasian markets will bid up the us markets basis dow 18000 to 25-35000 by 2017 despite slow growth. irrational exuberance will have cbn types trumpeting dow 50000 and when contagions overwhelms bullish sentiment by 2020 gove or take is markets will.nosedive too big to fail banks will fail echanges will freeze atms will jam food shottages and roots will lead to a state of emergency and shtf is possible. however this scenario could htf by next year or 2029-31. a century mark doesnt have to be exact. the psnic of 1907 anniversary was 2008.
sode from short term technicals trying to stamp expiration dates on the petrodollar etc ignores the uncrrtaonty principle. you can say shtf purge is not 50 years away but uou cant say only 5 either. the prpactove plan is to bail on volatile markets too soon and buy more gold between 1100 and 900 and stay calm of ot trades down to 750 briefly. unlike gokd ninets gokd has intrinsic value. moving out of big cities ideally to farming communities off the power grid is tje maon pbjective. invest in self sufficiency.
beyyer to be 20 years too early than 20 days too late.
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The Fed cannot raise interest rates because there is so much unrepayable debt out there any interest hike would cause an avalanche of defaults and bankruptcies. Even if some could handle a couple of .25 rises, they would bail at the second noting the pendulum swing and would prefer to start over before they went under anyway. There are entities out there with such huge bad dept that even 1% will fold them — take a 1000mil debt for example…….with a company that only turns over 500mil.
Kirk and Ted are both right. Our economy is a lot worse off than many people believe and the govt. is willing to admit. Govt. keeps telling us how things are getting better and all I hear in the neighborhoods are increasing numbers of people and families losing their jobs and homes.
As for the political circus, I think Ted is correct. There’s a a great deal of “noise” from the seasoned politicians. They are wasting their time responding to Trumps’ boorish and insulting comments rather than addressing the problems of the country. For the rest of us, watching the dryer go around is more exciting.
The seasoned politicians are the guys who created this mess.
The market will head down in a major way at some point in the future because debt is unmanageable. Commodities have already shown that capacity is excessive world wide. Disposable income is falling and the favored consumption (healthy) economy theory has more going against it than for it. How can an economy be forever in borrow mode and never in save mode?
At the same time the government in its usual, artificial and unstable way just might be able to pull off another insignificant climb in stocks.
So, with put options being so expensive, that means one might gamble a little on selling them or buying calls, at least short term since the big crash probably won’t occur til
mid/late Sept.
I’ve been getting some teasers on selling calls lately. Perhaps u could give us some tips.
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