VIX posts largest ever daily percentage decline

By Angela Moon and Doris Frankel

CHICAGO (BestGrowthStock) – A key measure of U.S. stock market volatility on Monday logged its largest ever one-day percentage decline, tumbling nearly 30 percent.

After more than doubling over the past four trading days, the Chicago Board Options Exchange Volatility Index (.VIX: ), Wall Street’s favorite yardstick of investor anxiety, ended down 29.6 percent at 28.84 points.

It is also the first time the index has risen more than 20 percent in one trading day and then declined more than 20 percent in the next session, according to Bespoke Investment Group, LLC.

On Friday, the VIX closed at 40.95 — its highest since April 2009.

“Accommodating action from the European Central Bank and the U.S. Federal Reserve helped to ease investor anxiety levels,” said Frederic Ruffy, options strategist at web information site WhatsTrading.com.

On Wall Street, U.S. stocks (Read more about the stock market today. ) racked up their best one-day gain in over a year on Monday with the Dow (.DJI: ) ending up 3.9 percent and the S&P 500 (.SPX: ) gaining 4.4 percent. The Nasdaq (.IXIC: ) rose 4.8 percent.

The bailout package approved by European leaders early on Monday drove the S&P 500 to its highest opening gain on record as indexes crossed back into positive territory for the year after last week’s sharp slide wiped out year-to-date gains.

The VIX is a 30-day risk forecast of stock market volatility and typically has an inverse relationship with the S&P benchmark.

The drop in the VIX “doesn’t mean the people are not all of a sudden not fearful at all. But the rescue package, the coordinated efforts of the market are giving fewer reasons to invest in options,” said Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com in Chicago.

“Volatility is definitely back in the market at least for now. Today was the perfect example of the type of swings that we will see continuing,” said Chris McKhann, an analyst with optionMonster.

Volatility may not be at the same magnitude during the summer, but uncertainties remain.

“I would expect this to be a summer filled with some volatile days as we still have a lot out there that is unknown, including the proposed financial regulation and the constantly fluid situation in Greece and the rest of the euro zone,” said Joe Kinahan, TD Ameritrade’s chief derivatives strategist.

McKhann noted that institutional traders were betting on lower volatility as many sold put options in the S&P 500 and bought puts on the VIX, suggesting lower volatility index levels.

VIX FUTURES REFLECT SLIGHTLY LOWER VOLATILITY

VIX futures from May to December traded in the 27 to 28 range.

“That tells us that traders are betting on slightly lower volatility going forward,” McKhann noted. “But during past volatility spikes, we have not seen this type of flat term structure in VIX futures.”

Trading in VIX options was brisk with about 353,000 calls and 214,000 puts traded on the volatility index, according to options analytics firm Trade Alert.

Another big driver is the actual volatility in the market, which is rising. The historic volatility for the S&P 500 stood at 26 percent over the past 10 days as of Friday’s close, up from about 7 percent in mid-April, McKhann said.

After stocks’ rally on Monday, historic volatility will be even higher.

Investing Research

VIX posts largest ever daily percentage decline