“Volatility’s prolonged absence from the stock market appears to be coming to an abrupt end.
After being largely invisible for the past nine months – coinciding with a sharp equity rally – several signs indicate that instability is coming back.
Call options buying recently hit a three-year high for the CBOE’s Volatility Index, a popular measure of market fear that usually moves in the opposite direction of the Standard & Poor’s 500 stock index.
(Read More: Scary Pattern Could Be Forming on S&P 500 Chart)
A call buy, which gives the owner the option to purchase the security at a certain price, implies a belief that the VIX is likely to go higher, which usually is an ominous sign for stocks.
“We saw a huge spike in call buying on the VIX, the most in a while,” said Ryan Detrick, senior analyst at Schaeffer’s Investment Research. “That’s not what you want to hear (because it usually happens) right before a big pullback.”
The last time call options activity hit this level, on Jan. 13, 2010, it preceded a 9 percent stock market drop that happened over just four weeks, triggered in large part by worries over the ongoing European debt crisis.
“That obviously has been the smart money in the past,” Detrick said. “We’re not ignorant to the fact that this could be the same thing. The fears out of Europe for whatever reason spring up in the springtime.”…”
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