Investor Anxiety Hits a Fever Pitch After Silicon Valley Bank Collapse

This WSJ article provides quite a bit of detail about how investors are hedging their exposure to bank risks using a wide variety of different types of financial derivatives.  This article notes, among other things, that trading volumes in put options, especially puts written on the SPDR S&P Regional Banking ETF (exchanged traded fund), are quite popular, with trading volumes on the Chicago Board Options Exchange (CBOE) hitting near record daily volumes.  Other popular strategies mentioned in this article include shorting bank stocks, buying credit default swaps on bank stocks, and buying call options on the VIX index in hopes of protecting investors against further stock declines.

VIX is back in the news (Page 1 feature article in today’s WSJ)!

It’s back!  At the beginning of this semester, I introduced our class to the CBOE’s Implied Volatility Index (VIX) in my blog posting entitled “On the relationship between the S&P 500 and the CBOE Volatility Index (VIX)“.  In that posting, I pointed out how over relatively short time intervals, percentage changes in VIX and SP500 indices move inversely.

VIX measures market expectations for stock market (S&P500) volatility over the coming 30 days.  It is commonly referred to as a “fear index”, and as such, it is indicative of the near-term degree of overall investor risk aversion.

This article mostly focuses on how investor fears of more aggressive Fed rate hikes and a possible recession are causing prices of options to be bid up, as investors “scurry for protection”.

Investors Are Bracing for Surge in Market Volatility
Bets on a rise in Wall Street’s fear gauge swell to most since March 2020

A Random Walk Down Wall Street – one of many coming attractions in Finance 4366

If you were to read only one book about finance, it would have to be “A Random Walk Down Wall Street: The Time-Tested Strategy for Successful Investing” by Burton G. Malkiel.  Malkiel’s book (now in its 12th edition) provides a compelling argument in favor of efficient markets theory and investing in (passively managed) index funds.

The efficient market theory implies that stock prices follow a random walk. These ideas were originally conceived by Professors Paul Samuelson (MIT) and Eugene Fama (Chicago) in the 1960s and subsequently popularized by John Bogle (founder of Vanguard), Professor Malkiel (Princeton), and others. In Finance 4366, we rely extensively on the notion that prices of speculative assets (e.g., stocks, bonds, commodities, foreign exchange, etc.) follow random walks as we consider the technical details associated with pricing and hedging risk using financial derivatives.