Option fear gauge posts second largest 7-day drop

By Doris Frankel

CHICAGO (Reuters) – The Chicago Board Options Exchange Volatility Index, a barometer of investor anxiety known as the VIX (.VIX: Quote, Profile, Research), on Friday posted its second biggest seven-day decline in its history.

The VIX is down 39.1 percent over the last seven trading sessions and 42.7 percent below the March 16 multi-month highs of 31.28 when the underlying S&P 500 index (.SPX: Quote, Profile, Research) broke the 1,250 level and closed at 1,256.88.

The biggest ever seven-day decline for the index was in the period ending November 4, 2008, when it fell 39.7 percent.

“Investors again are showing no fear,” said Chris McKhann, an analyst at Chicago-based stock and options website optionMonster.com.

“People are discounting everything that is going on in the world from the turmoil in the Mideast and North Africa, the sovereign debt crisis in Europe and the issues still simmering in Japan from the nuclear crisis.”

The general bad news over the past two months has repeatedly been shrugged off by equity markets and that is being reflected in the Volatility Index, said Nick Cherney, chief investment officer for VelocityShares, a Connecticut-based firm specializing in volatility products.

The change in sentiment in the VIX is seen as a sign of complacency in the equity market, analysts said.

The VIX, a 30-day measure of expected stock market volatility of the S&P 500 index, has a component of fear as investors either buy or sell protection in the form of near-term SPX options when markets decline, McKhann said.

Heading into the weekend, the VIX slipped 0.50 percent to 17.91, its lowest close since gapping up on February 22.

McKhann also noted that historical volatility for the SPX over the past 10 and 20 days is right up under 18 percent.

In volatility derivatives, the VIX futures contracts are carrying an increasing premium to spot VIX, indicating that traders expect higher volatility going forward, McKhann said.

“It appears that VIX futures are pricing in a more accurate measure of volatility at the current time,” said Dam Deming, managing director of Chicago-based options trading firm Stutland Volatility Group.

The April contract closed at 19.75 while May was unchanged at 21.05 with the back months a bit higher ranging from more than 22 to 24. VIX options trading, which are priced off of VIX futures, has been mixed over the past week.

The CBOE created the VIX in 1993 and began disseminating prices for a VIX Index with a new methodology on September 22, 2003. The VIX is an up-to-the-minute market estimate of expected volatility that is calculated by using real-time SPX option bid/ask quotes and often moves inversely to the S&P benchmark.

(Reporting by Doris Frankel; Editing by Andrew Hay)

Option fear gauge posts second largest 7-day drop