By Doris Frankel
CHICAGO, Aug 17 (Reuters) - Fear is taking root in the market once again.
The Chicago Board Options Exchange Volatility Index , or VIX, shot up nearly 15 percent on Monday to a one-month high, a sign that investors expect more gyrations in the U.S. stock market in the near term.
The VIX, Wall Street's favorite barometer of investor sentiment, finished at 27.89, up 14.92 percent, its biggest daily percentage gain since April 20, as the underlying Standard & Poor's 500 index lost 2.4 percent on renewed concerns about the sluggish economy.
'The primary worry is that the economy is not out of the woods and the American consumer, which has become an important part of any global economic rebound, is still reeling from lost wealth, rising joblessness, and tighter credit,' said Frederic Ruffy, option strategist at Web site WhatsTrading.com.
Investors scrambled for protection this morning with aggressive buying of SPX options. The VIX later surged to an intraday peak of 28.39, its highest level since mid-July.
The VIX, a 30-day risk forecast priced off of S&P 500 index options, often moves up as the benchmark S&P falls and as investors bid up options to manage their market risk.
'Monday's steep sell-off in U.S. stocks caught many option traders by surprise as many were clamoring for protective S&P 500 index options to offset their portfolio risk and were willing to pay more for them,' said Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com in Chicago.
Later-dated futures expiring in September through December are all above a 29 reading, with October at 30.95 and November at 30.40, a sign traders expect more volatility in coming months.
HISTORY LESSON
Notably, historical volatility for the S&P 500 index, which measures the past daily gyrations of the benchmark, was at a 52-week low of nearly 17 percent over the past 30 days before Monday's sell-off.
While historical volatility after Monday's data is included will probably follow the VIX higher, the recent divergence between the two indicates investors are more anxious than would be anticipated.
'Either the VIX will come in or the actual volatility that these prices suggest will come to be,' said Chris McKhann, analyst at Web site optionMonster.com.
The spot VIX is moving more in line with later-dated futures, suggesting that smart money that was bidding up volatility was correct, he added.
The nearly 50 percent gain in the S&P 500 from a 12-year closing low in early March, which was driven by hopes of a quick economic turnaround and better-than-expected corporate earnings, has led to worries that the market is overextended. Last week's disappointing data on retail sales and consumer sentiment aggravated those concerns.
This week also marks the expiration of August options, which could add to volatility as traders unwind their options versus stocks and futures positions.
August options go off the board on Friday after the close and front-month August VIX futures settle on Wednesday.
(Reporting by Doris Frankel; Editing by Jan Paschal) Keywords: VOLATILITY VIX (doris.frankel@thomsonreuters.com; +1 312 408 8752; Reuters Messaging: doris.frankel.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
CHICAGO, Aug 17 (Reuters) - Fear is taking root in the market once again.
The Chicago Board Options Exchange Volatility Index , or VIX, shot up nearly 15 percent on Monday to a one-month high, a sign that investors expect more gyrations in the U.S. stock market in the near term.
The VIX, Wall Street's favorite barometer of investor sentiment, finished at 27.89, up 14.92 percent, its biggest daily percentage gain since April 20, as the underlying Standard & Poor's 500 index lost 2.4 percent on renewed concerns about the sluggish economy.
'The primary worry is that the economy is not out of the woods and the American consumer, which has become an important part of any global economic rebound, is still reeling from lost wealth, rising joblessness, and tighter credit,' said Frederic Ruffy, option strategist at Web site WhatsTrading.com.
Investors scrambled for protection this morning with aggressive buying of SPX options. The VIX later surged to an intraday peak of 28.39, its highest level since mid-July.
The VIX, a 30-day risk forecast priced off of S&P 500 index options, often moves up as the benchmark S&P falls and as investors bid up options to manage their market risk.
'Monday's steep sell-off in U.S. stocks caught many option traders by surprise as many were clamoring for protective S&P 500 index options to offset their portfolio risk and were willing to pay more for them,' said Steve Claussen, chief investment strategist at online brokerage OptionsHouse.com in Chicago.
Later-dated futures expiring in September through December are all above a 29 reading, with October at 30.95 and November at 30.40, a sign traders expect more volatility in coming months.
HISTORY LESSON
Notably, historical volatility for the S&P 500 index, which measures the past daily gyrations of the benchmark, was at a 52-week low of nearly 17 percent over the past 30 days before Monday's sell-off.
While historical volatility after Monday's data is included will probably follow the VIX higher, the recent divergence between the two indicates investors are more anxious than would be anticipated.
'Either the VIX will come in or the actual volatility that these prices suggest will come to be,' said Chris McKhann, analyst at Web site optionMonster.com.
The spot VIX is moving more in line with later-dated futures, suggesting that smart money that was bidding up volatility was correct, he added.
The nearly 50 percent gain in the S&P 500 from a 12-year closing low in early March, which was driven by hopes of a quick economic turnaround and better-than-expected corporate earnings, has led to worries that the market is overextended. Last week's disappointing data on retail sales and consumer sentiment aggravated those concerns.
This week also marks the expiration of August options, which could add to volatility as traders unwind their options versus stocks and futures positions.
August options go off the board on Friday after the close and front-month August VIX futures settle on Wednesday.
(Reporting by Doris Frankel; Editing by Jan Paschal) Keywords: VOLATILITY VIX (doris.frankel@thomsonreuters.com; +1 312 408 8752; Reuters Messaging: doris.frankel.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.