The Greece Crisis is No Black Swan

Looking at Europe's VIX-ish volatility gauge

by Adam Warner

Published on Jul 7, 2015 at 8:57 AM

When the going gets tough, the tough get going… into European options! This, from Bloomberg:

"Whatever happens after Greece's vote, stock investors have had time to prepare. 

They've taken action in the options market to hedge against equity selloffs, trading an average of 1.6 million Euro Stoxx 50 Index contracts each day in the past month -- the most since 2011.

… Gauges of equity volatility have surged in European markets, where a first-quarter rally that added almost $2 trillion to share prices has roughly cut in half on concern Greece will exit the euro. The VStoxx Index jumped 21 percent last week and touched its highest level since 2012 as equities posted their biggest decline in 3 1/2 years on June 29." 

Viewed through the 2015 lens, Euro Stoxx 50 Volatility (VSTOXX) has indeed exploded lately.

150707Warner1

Longer term, though? Eh. We ain't seen nothing yet.

150707Warner2

It looks almost exactly like a long-term chart of the CBOE Volatility Index (VIX), albeit with the timing of the peaks and valleys a bit different. VSTOXX around 30 looks kind of like VIX around 25. That is to say, a bit elevated but nowhere near potential tops. 

I doubt VSTOXX sees 2008-09 sort of levels, because I really, really, really doubt Greece is the sovereign version of Lehman. But when you see this chart, it sure seems like VSTOXX at 40 is more than possible. Realized volatility is surging, and the story still hasn't resolved itself yet. 

On the other hand, we're going on five years of "Grexits" and "Greferendums" and all sorts of GR words. It's pretty likely someone somewhere has prepared for this day. In fact, it's very likely. Relatively short-term volatility pops happen 3-5 times every year and are tough to time. I don't tend to believe lasting volatility storms come from stories that have dragged out forever.  

It wasn't that long ago that the Financial Media Industrial Complex overused and misused the term "Black Swan" to explain every "surprise" in the marketplace. The whole concept of the Black Swan is that it's an unexpected and unanticipated event. No one's actually calling the recent Greece developments a "Black Swan," per se, but they're treating it as such.

I can't speak to the real effects of Greek default and Greece leaving the euro. I can speak to market psychology, though, and my guess is we're fairly close to the point where this story is fully discounted in our markets. 

Will we rally soon? Well, who knows? This isn't the only story out there. China's market is insanely volatile lately, and a crash there is probably not discounted over here. All I'm saying is I think we're finally near the point where we can mercifully Grignore Greece. 

Disclaimer: Mr. Warner's opinions expressed above do not necessarily represent the views of Schaeffer's Investment Research.


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