September 9, 2011 / 7:25 PM / in 7 years

Options risk gauge soars as investors seek safety

CHICAGO (Reuters) - Nervous investors scrambled on Friday to protect their assets, paying higher prices for options ahead of the weekend as European debt woes weighed on the prospects for global growth.

Traders work on the floor of the New York Stock Exchange September 9, 2011. REUTERS/Brendan McDermid

Wall Street stocks sank after European Central Bank board member Juergen Stark resigned in protest over the bank’s bond-buying program, which has been a major tool in fighting the region’s debt crisis.

“The risks that an external shock could tip the U.S. economy into a recession have increased, leaving investors clamoring for protection in the U.S. options market,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

The rout in U.S. stocks sent the CBOE Volatility Index, Wall Street’s favorite barometer of investor sentiment, known as the VIX .VIX, to an intraday high of 40.74. The options gauge came off the highs and finished at 38.52, up 12.24 percent.

Investors were on edge on fears of negative headlines from the Eurozone over the weekend.

“The European crisis seems to be worsening by the day,” said TD Ameritrade Chief Derivatives Strategist J.J. Kinahan. “This is causing much anxiety among investors who don’t want to take a risk of leaving their positions unprotected in a weekend that could see breaking news.” he said.

Furthermore, “credible but unconfirmed” terrorism threats against New York City and Washington just ahead of the 10th anniversary of the September 11 attacks prompted investors to sell equities ahead of the weekend.

The VIX, a 30-day risk forecast of stock market volatility conveyed by S&P 500 index .SPX option prices, typically moves higher when the S&P benchmark suffers significant declines.

Recent attempts for a rebound in U.S. stocks have failed to deflate the value of the VIX, which has remained elevated above a 30 reading since August 4. The last time the VIX hit the 40 level was on August 26, when it hit an intraday high of 43.84.

Still, a VIX above 40 reflects renewed concerns about the problems in Europe, the risks to the global economy and uncertainty about future earnings, said WhatsTrading.com options strategist Frederic Ruffy.

Gains in VIX futures also show considerable concern about the equity markets in the months ahead.

Both the iPath S&P 500 VIX Short-Term Futures exchange-traded note (BARC.L) (VXX.P) and September VIX futures posted new highs for the year, said Chris McKhann, analyst at Web information site optionMonster in Chicago.

“These are better indicators of volatility expectations in the market,” he said. The VXX ended 9.55 percent higher at $45.85 and September VIX futures closed at 38.55.

Fear is elevated. But Ruffy noted it is not the panic extremes seen last month, when options volume on U.S. exchanges hit new records and the VIX notched 15-month highs of 48.

“There is no reason to expect the VIX to come off these elevated levels until we see some clarification of the European debt situation or an improvement in the U.S. employment data,” Kinahan said.

    Reporting by Doris Frankel; Editing by Dan Grebler

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