It's time to buy a stock market insurance


On the stock market, the ideal moment seems to be that of the insured rather than that of the insurer.

Equities have been extremely volatile since October as investors panicked over a possible US recession, trade tensions and a slowdown in the global economy. This led to a jump in the Cboe or VIX volatility index, known as Wall Street's "Finger Guage", as it tracks the expected daily fluctuations of the S & P 500 Index over the course of 30 years. next days through option contracts.

Still, the VIX still does not look as high as it should be. After having recently risen above 35, it has returned below 20. This may seem high, but it is significantly lower than the actual volatility of the S & P 500 over the past 30 days.

Such situations are rare, as option prices generally overestimate future volatility. It's like in the insurance industry: over time, most people who insure their homes pay more premiums than they receive in return, without having peace of mind, while insurers tend to make a profit, even if they sometimes have to pay a lot.

Traders on the floor of the New York Stock Exchange on January 4.

Traders on the floor of the New York Stock Exchange on January 4.


Richard Drew / Associated Press

Of course, the VIX can simply assume that realized volatility is so unusually high – currently at its highest level since 2015 – that it will decline. But it is not the assumption in the futures that allows investors to buy or sell the VIX. These remain more expensive for shorter maturities than longer ones, suggesting that markets expect more fluctuations in the short term, even though stocks have recovered.

In the absence of a real sign of recession in the United States and valuation of more attractive valuations, the calm of the year in the markets could be maintained. But the options presently offer investors an interesting way to acquire cheap protection in case this is not the case. Before the start of the reporting season in the fourth quarter of next week, it seems like it's a good idea to clarify the companies' results.

After starting well, 2018 turned out to be a horrible year for the markets. Will 2019 be better? James Mackintosh and Riva Gold, WSJ, draw a picture of the outlook.

Write to Jon Sindreu to jon.sindreu@Good Assurance