Options fear index hits 50 in busy expiration week

01.15.09, 03:53 PM EST By Doris Frankel

CHICAGO, Jan 15 (Reuters) - The Chicago Board Options Exchange Volatility Index rose above the psychological 50 mark for the second straight day, reflecting an increase in risk perception fueled by the fallout in the financial sector during a busy week of options expiration.

The VIX, often called Wall Street's fear gauge, was up 3.19 percent to 50.71. It earlier peaked at 55.16, its highest level since mid-December, just over the 50-day moving average of 54.56.

The rise in the VIX comes during the monthly expiration of January options, a factor that can often bring more intraday volume and price swings in the major stock benchmarks.

'Concerns about the ongoing troubles in the banking industry have raised risk perceptions and it comes amid heavy trading due to the options expiration,' said Frederic Ruffy, options strategist at Web site WhatsTrading.com.

The VIX, which tracks near-term projected stock market volatility priced into Standard & Poor's 500 index options, has moved up during this week's downdraft in stocks.

Trading is expected to be active Thursday and Friday as the January expiration includes many former LEAP contracts, which are longer-dated options that have open interest accumulated over more than two years, Ruffy added.

Traders have to close or roll their derivative positions before January equity options and stock index options go off the board on Friday.

Thursday is the last day for trading in the expiring option contracts in the S&P 500. Settlement of the S&P 500 January option contracts will be computed on Friday based on opening prices of the S&P 500 components. January equity options and options on some stock indexes expire after Friday's close.

EXPLOSIVE VOLUME

Option trading was on fire in the financial sector as traders focused on banks, including Citigroup, beset with mounting credit losses.

Some traders clamored for put options to protect their portfolios against another round of selling in financial sector while others favored call options in banks pinning hopes on a rebound beyond the current round of pessimism.

'Renewed concerns that the conditions in the financial sector are waring on the broad market and influencing option trading with active put and call trading in the S&P 500 partly due to expiration pressures,' said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.

Option volume in the Financial Select Sector SPDR fund was on fire with 234,000 puts and 263,000 calls traded, three times the normal volume, according to option analytics firm Trade Alert.

Wells Fargo January $20 puts, conveying the right to sell the stock at $20 by this Friday, was by far the most active as 227,953 contracts traded. Bank of America January $7.50 puts traded more than 80,000 times and 99,466 January 2009 at the $10 strike calls changed hands.

Puts in the January $10 strike in the XLF were busy with more than more than 81,000 traded. Some traders also grabbed February $11 XLF calls on speculation financial shares will recover in the short term, Fullman said.

Even in Citigroup, where there was extremely heavy volume, the call side was certainly not neglected. The February $7 calls, the March $7.50 and $9 call strikes were active.

'With the massive selling pressure of recent days clearly the debate has become more two-sided with a decent amount of call buying interest across several banking names,' said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.

(Reporting by Doris Frankel; editing by Gary Crosse) Keywords: VOLATILITY VIX/