When will the “Risk Trade” start to be reflected in the VIX?

Lately, when the din of geopolitical and commodities based price shocks allow, the "Risk Trade" of buying sophisticated financial products, inter-currency trades or any commodity that can be a generic equivalent of an inflation trade grinds on based on a wash of liquidity. But the stock market continues to indicate through the lack of any sustained increase in the VIX, in both historical and implied, that the US equity markets are, and will continue to be, immune from this.

In his recent testimony to congress, Bernanke took full credit for the 25-35% increase in most of the stock market indexes, but indicated that roughly the same percentage move in just about every commodity he had nothing to do with "as he does not control droughts". When I took Economics 101, I was never told that these monetary policies were that precise, but rather very blunt instruments with wide ranging effects (they may have saved that for the doctoral classes). The last time someone went before congress and said that they did super human things without the use of bad things (remember baseball players and steroids?) they got into trouble, but Bernanke raising the markets that much without inflation? If everything has gone up in value roughly the same amount, maybe, just maybe, what you are using to value those increase (aka dollars) might have gone down that much (a saying from the trading floor was – if it looks, sounds, walks and acts like a duck – it just might be a duck).

In seven of the last nine trading days the Dow had a three digit move equaling the total number of such moves for the first two months of the year. The 10 day historical volatility jumped to 18.28 compared to that same reading for the previous week and previous months of less than 14. Are we finally seeing the "risk trade" being reflected in the fear factor, or are we still drinking the Kool-Aid that our central banks liquidity, even with its stated end date, is a free put on volatility?

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Dan Haugh


Dan Haugh is President of PTI Securities & Futures L.P. a boutique options execution and risk management firm. Before joining PTI Securities, Dan traded grain and bond options as a floor trader on the CBOT, and stock options as a member of the CBOE. He is a regular contributor on Bloomberg, Fox Business News and other…