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Home » Blog » 2011 » 07 » Worried that the debt ceiling issue may become a crisis?

Are you worried that the wrangling over the debt ceiling might become a crisis for the stock market?  A number of analysts are predicting dire results if the ceiling is not passed by the August 2nd deadline.  In fact, some say that even now it's too late to keep the U.S. credit rating at AAA.  I think the stock market as a whole is smart enough to discount these possibilities, and therefore such worries are probably overblown since the market is rallying, not plunging.

However, some analysts are digging up the fact that, in October 2008, the Dow plunged something like 787 points when Congress failed to pass TARP.  The entire tone of the market was different then than now, for one thing.  The Lehman Brothers failure was still the over-riding problem with the stock market back then, and we don't have anything similar right now.  Essentially we were in a downdraft in a bear market before that TARP vote ever occurred.   That certainly exacerbated things.

Even so, there is a cheap alternative now, if you are worried: buy some August $VIX 25 calls for 50 cents.  If a crisis develops -- especially one of the magnitude that the most negative analysts are predicting -- then $VIX (and the August front-month futures) will surely explode far above 25, and those calls will be valuable insurance for your stock portfolio, or whatever else you're trying to protect.

If you're unclear on how many to buy, check out our Monday subscription service newsletters, for we'll be discussing that topic.