If 2008 was a year that markets vastly underestimated risk, then 2009 was surely one when markets overestimated it big time.
Shown below is the ‘Chicago Board Options Exchange Volatility Index’. aka the VIX. It’s a measure of the implied stock volatility (ie. risk) priced into the options market for S&P500 stocks.
In 2008, options traders progressively (and at times violently) realised they had priced far too little risk into options prices, as shown by the rising VIX in blue.
In 2009, the exact opposite happened, shown by the falling red line. Risk was consistently overestimated, and stocks rallied at the same time. Thus given the market’s track record, 2010 could deliver more volatility than traders are ready for.
Get This Delivered To Your Inbox
You can get this dropped in your inbox every afternoon as The Chart Of The Day. It’s simple. It’s convenient. It’s free. All we need is your email address (though we’d love your name and state, too, if you’re willing to share it). Sign up below!
Email State First Name Last Name
Business Insider Emails & Alerts
Site highlights each day to your inbox.