By Jud Pyle, CFA, chief investment strategist for the Options News NetworkBrutal day in the markets today, with all major market indices down over 3%. With the selloff, the CBOE SPX Volatility Index (VIX) is up more than 11% today. Several articles had been written during the last selloff that ended March 9 that the VIX was not correlating with the S&P 500 the way it had in the past. The normal correlation is for the VIX to rise when the market falls. But in February and early March, that relationship was less strong. Today at least, the VIX is following the drop in the market as expected. The VIX can be a complicated concept to comprehend. But one concrete thing to look at instead is the S&P Depositary Receipts ( SPY) front-month, at-the-money straddle. Today, the April straddles are expanding as a percentage of strike. Looking at the SPY April 79 straddle, we see that the calls are trading for around $2.80 and the put for $3.10, with the stock right around $78.67. That means the straddle is around $5.90 because the straddle is the sum of the call and the put. On Friday at the close, the SPY was at $81.61, so the 82 strike was at-the-money. The straddle closed at $5.94. So the straddle has gone down by 4 cents. How can the VIX be up with a declining straddle you may say? But what makes this interesting is that here we are with one less day until April expiration, and yet the option market is pricing a range that is larger on a percentage basis than it was prior to the weekend. Currently, the straddle is 7.46% of strike (5.9/79), while on Friday it was 7.24%.
Aside from the rising VIX, another indication that fear is on the rise today is the decline in junk bond prices. The SPRD Lehman High Yield Bond ETF ( JNK) is down more than 2% today. The spread of junk-bond yields to Treasury yields typically rises when investors demand more risk premium.
Warren Buffett has been quoted saying it is good to be fearful when others are greedy and greedy when others are fearful. Today there is definitely plenty of fear for investors with strong stomachs to take advantage of. Jud Pyle is the chief investment strategist for Options News Network (www.ONN.tv) and the portfolio manager of TheStreet.com Options Alerts. Click here for a free trial for Options Alerts. Mr. Pyle writes regularly about options investing for TheStreet.com.