Options fear
gauge spikes up as volatility looms
11:30 06Jun2008
By Doris Frankel
CHICAGO, June 6 (Reuters) - The Chicago Board Options Exchange Volatility Index, or VIX <.VIX>, Wall Street's main barometer of investor fear, surged on Friday in a sign U.S. stocks face a bumpy road ahead amid fresh concerns over the health of the U.S. economy.
The VIX soared 15.83 percent to 21.57, its best level since April 16, as U.S. stocks tumbled after a government report showed the unemployment rate jumped to its highest in over 3-1/2 years in May.
"Today's employment report combined with a sharp jump in crude oil prices has raised concerns about the U.S. economy as well as the perception of risk for the U.S. equities market," said Scott Fullman, director of derivative investment strategies at broker-dealer WJB Capital Group in New York.
Traders and analysts said that investors have been snapping up protective puts pegged to several stock benchmarks, including the Standard & Poor's 500 index <.SPX>. That has driven up premiums and the fear gauge rose sharply as a result.
The VIX is trying to find an appropriate level and has been rangebound between 17 and 22 since mid-April, noted Michael McCarty, chief options strategist at broker-dealer Meridian Equity Partners in New York.
The VIX measures projected stock market volatility embedded in near-term S&P 500 option prices. It rises when investors are inclined to bid up options to manage their stock market risk.
Investors typically use index puts, which give the right to sell the underlying index, to protect their portfolios against downside risk or to speculate on further losses.
McCarty also said that premiums on index puts to insure a portfolio have become more expensive ahead of the earnings reporting period.
"We are stepping into the earnings season and the area of the greatest concern is the financial stocks, many of which report within the next two weeks," he added.
This is the seventh time in the past two weeks that the fear gauge has traded above a reading of 20 on a intraday basis.
A 20 reading is viewed by some as a psychological resistance level for the VIX, which generally runs inversely to the S&P 500 benchmark. The S&P 500 index last traded down 1.9 percent at 1,377.39 points.
Investors were also said to be playing it safe with puts in several indexes and exchange traded funds that track the major stock benchmarks, said independent options trader Frederic Ruffy.
He noted sizeable buying interest in put options in the S&P 500 index as well as the popular ishares Russell 2000 Index Fund
So far, 213,000 S&P 500 index puts have traded, or more than three times the number of call options, according to option analytics firm Trade Alert.
The June 1225 and June 1250 are the busiest SPX put contracts, which reflects the fact that investors are actively seeking out short-term portfolio protection, Ruffy said.
(Reporting by Doris Frankel; editing by Gary Crosse)
((doris.frankel@thomsonreuters.com; +1-312-408-8750; Reuters Messaging: doris.frankel.reuters.com@reuters.net)) Keywords: VIX VOLATILITY Friday, 06 June 2008 11:30:55RTRS [nN06413887] {C}ENDS