Stock Market Disconnect in Options Reveals Risk

U.S. stocks are rallying the most in seven decades, housing prices are stabilizing and the economy is expanding again after the worst recession since the Great Depression. Yet Dean Curnutt, founder of options advisory and brokerage firm Macro Risk Advisors LLC in New York, is wary.

Curnutt studies the equity options market to gauge traders’ expectations of swings in stock prices, or volatility. He’s concerned because he’s picked up mixed signals in recent months, Bloomberg Markets magazine reports in its June 2010 issue.

On the one hand, the benchmark measure of volatility on short-dated options -- the Chicago Board Options Exchange Volatility Index, or VIX -- fell in mid-April to where it was before the global credit crisis, indicating that investors weren’t expecting any shocks for equities. At the same time, mounting U.S. debt and questions as to what the removal of government stimulus measures might mean for the recovery indicate that risks to the financial system remain. (more)