Tuesday, July 17, 2007

Irrational exuberance meets unconstrained fear

We're living through some of the craziest markets I've seen in some time. Despite the rash of bad news about the economy in general - terrorist threats, commodity prices, inflation, housing - the market keeps pushing out new highs and the VIX is at relatively low levels, hovering around a 15 - kind of a lime yellow if I had to color code it. Yet, in a few specific names, we're seeing volatilities explode for no apparent reason. Particularly in financials and tech stocks, demand for options are outstripping supply and sending option prices into the stratosphere.

Mid-term vol in AAPL - which typically moves around a 35%, is trading well into the mid-40% on no particular news. CROX - maker of the kid-popular Crocs sandles, is hovering around the 70% vol level and MBI, a well-capitalized bond re-insurer is still battling perceptions that it is over-exposed to sub-prime risk.

Most of the time the markets make some sort of sense. Today is not one of those times.

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