U.S. options risk gauge jumps on euro-zone woes

By Angela Moon and Doris Frankel

NEW YORK/CHICAGO (BestGrowthStock) – Wall Street’s favorite measure of investor anxiety, the Chicago Board Options Exchange Volatility Index (.VIX: ), logged its biggest one-day percentage jump in 18 months on Tuesday as investors fretted about euro-zone debt woes.

The VIX’s surge coincided with U.S. stocks (Read more about the stock market today. ) posting their worst day in nearly three months after the credit ratings of both Greece and Portugal were cut, escalating concerns about their sovereign debt.

The so-called VIX jumped 30.6 percent to 22.81, its highest close since February 11.

The cost of insuring Greek and Portuguese debt against default rose to record highs after rating agency Standard and Poor’s slashed the sovereign ratings of both countries.

The benchmark Standard & Poor’s 500 index (.SPX: ) fell 2.34 percent to 1,183.71 after a significant advance. It has run up 75 percent from 12-year lows in March last year.

“That run has caused many market participants to believe that there is more downside risk than upside potential in the market,” said Jud Pyle, chief investment strategist at Options News Network, a division of option marketing firm PEAK6 Investments in Chicago.

“So when you get negative news like the Portuguese debt downgrade, it causes uncertainty, and that uncertainty is exemplified by the VIX.”

Chris McKhann, analyst at Web information site optionMonster, said the equities market is expected to see more stock gyrations in the coming weeks.

McKhann looks at volatility in relation to what traders are expecting from futures and options which are priced off of futures, on the VIX.

June VIX futures ended higher and stood at 22.40, with rest of the board pricing in additional volatility through the end of year.

VIX options activity was also brisk as about 228,000 calls and 127,000 puts changed hands, according to option analytics firm Trade Alert.

“Traders were buying VIX call options and S&P 500 put options as risk protection against a possible further downside correction in stocks,” said Dan Deming, VIX options trader at Stutland Equities.

“Traders are definitely bidding up VIX call options, buying everything they can get their hands on,” McKhann said.

One notable trade was the May 40 VIX calls which were bought at a premium for 25 cents, suggesting the volatility index would nearly double within the next three weeks, he said. The last time the VIX was above 40 was April 2009.

Coming into Tuesday, the historical volatility for the S&P 500 over the past 30 days stood at 9 percent, near its 52-week lows. “It will certainly come up after Tuesday’s setback in stocks,” McKhann said.

The VIX is a 30-day risk forecast of stock market volatility, conveyed by S&P’s 500 index option prices and generally moves inversely to the S&P benchmark index. Tuesday’s rise was the biggest since a 31.1 percent jump on October 22, 2008.

“There is plenty of uncertainty out there, and until the Greek financial situation and U.S. regulatory reform have more definitive answers, the 20 level in the VIX looks like it will part of the trading range for the rest of the summer,” said TD Ameritrade chief derivatives strategist Joe Kinahan.

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(Reporting by Angela Moon and Doris Frankel; Editing by Kenneth Barry)

U.S. options risk gauge jumps on euro-zone woes