Once again volatility has returned to the marketplace. This time it's fear generated. I don't have the hourly data, but you can see VIX move up and down by substantial percentages during the trading day – as the world becomes afraid, or somewhat reassured, or frightened once again by world events.
The one big occurrence this week was the sudden disappearance of bids. Large order flow resulted in a 700 point decline in the Dow Jones Industrial average over a 15-minute period. The index moved from -300 to -1000 and back again to -300.
Investors who had placed stop-loss orders for their stock positions got unjustifiably hammered when there were no reasonable bids available. It didn't happen everywhere, but some of those stop orders became market (not limit) orders and were filled at horrible prices.
Then there were investors who sold 'at the market.' I don't like market orders, but this time they were unmercifully hurt. Some thinly traded stocks traded down to mere pennies, when that became the best available bid. Such trades were supposed to be canceled, but I have no idea whether that truly happened.
The events of this week once again point out the desirability of owning portfolio insurance or eliminating stocks from your portfolio and replacing them with call options that are in the money (and thus have relatively low time premium). Of course, after this week, those calls have much greater time premium, making this strategy more expensive.
Coming in the May 2010 issue (May 24, 2010) of Expiring Monthly Magazine:
Interview with Dr. Brett Steenbarger
Floor Stories by Mark Sebastian. How market makers think
+ much more