The current devastating crash is one of history’s worst. However, the most interesting phenomenon is the complete absence of panic. Sure, investors may have trouble getting enough sleep and the crash will ruin some marriages – but the panic in the option markets remains absent.
When markets crash, the option prices rally as the price to be paid for insurance is exploding. With the indices closing at multi-year lows, the price of calls and puts rises only gradually. The implied volatility as measured by the VIX or one of its countless sisters (VDAX, VAEX,..) is way below November 2008 levels.
Scores of weblogs are addressing the issue of the low volatilities. The Daily Options report, Vix and More, and Stock Geometry to name just a few. A possible explanations has been the orderly sell-off, also coined the “slow motion capitulation”. Investors may also just turn to outright short selling instead of buying put options. A little unlikely, but possible.
From my professional perspective, I can confirm I’m not in panic either. It has been nearly half a year since Lehman’s collapse. During this time I had enough time to cover my job-risking short positions. Now we keep on falling as a rock, I don’t have to reach out for that red panic button. Apparently, I’m not the only calm witness of the meltdown.