By Doris Frankel
CHICAGO, Oct 30 (Reuters) - Investors scrambled to protect their portfolios on Friday as the market's key measure of volatility posted its biggest one-day percentage gain in a year.
Wall Street's favorite pulse of investor sentiment, the Chicago Board Options Exchange Volatility Index or VIX, rocketed 23.95 percent higher to 30.69, the highest it has been since July.
The index, a 30-day risk forecast priced off of Standard & Poor's 500 index options, ran up sharply as U.S. stocks slumped on concerns about the sustainability of the economic recovery. The VIX often moves inversely to the underlying S&P 500 index as option premiums are raised.
'Investors are concerned about the outlook for the final two months of 2009 and there is an increased demand for portfolio insurance,' said WhatsTrading.com option strategist Frederic Ruffy.
The market's sell-off erased Thursday's gains, the best one-day move in three months, which were built on a better-than-expected gross domestic product report.
Behind the volatility is the resurfacing of economic worries reflected by mixed government data.
There are concerns that GDP, which grew at a 3.5 percent rate in the third quarter, may slip as government stimulus recedes and consumer demand remains sluggish.
'On the one hand, GDP numbers supported a recovery theme,' said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. 'On the other hand, the economic growth is supported by consumption fueled by the government stimulus package. Thus, investors are worried over sustainability of both the recovery and the earnings-led rally.'
Heading into November, many investors took profits off the table.
According to quantitative strategists at Credit Suisse, an estimated 22 percent of mutual funds end their fiscal years at the end of October, and those managers may have moved to protect portfolios from sharp losses on the last day of their year.
A strong dollar and weaker commodities also infused much anxiety into the market.
'There is fear in the market as to whether the S&P 500 index can hold a significant 1,039 support level,' said Joe Kinahan, chief derivatives strategist at TD Ameritrade. 'If that breaks, we could be on a fast path down to the 1,000 level.'
Dan Deming, VIX options trader at options market making firm Stutland Equities, said, 'Nervous portfolio managers came after the November VIX call options, anticipating more volatility in the near term and sought put options in the S&P 500 and the SPDR S&P 500 exchange-traded fund,' said
According to option analytics firm Trade Alert, about 944,000 options in the S&P 500 index changed hands as puts outnumbered calls by a factor of 1.89. And in the SPDR S&P 500 , volume was double the norm with about 1.82 million puts and 736,000 calls traded, Trade Alert data show.
Meanwhile, the spot VIX outpaced VIX futures contracts across the board. November futures traded at a discount to VIX and was at 27.85 while December futures stood at 27.70.
'Traders could be buying S&P 500 options for protection and selling VIX futures as a hedge,' Deming said.
The volatility futures contracts could also suggest people do not foresee volatility remaining high. Although the VIX is back above 30, analysts expect it to come off those highs.
(Reporting by Doris Frankel; Editing by Kenneth Barry) 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, Oct 30 (Reuters) - Investors scrambled to protect their portfolios on Friday as the market's key measure of volatility posted its biggest one-day percentage gain in a year.
Wall Street's favorite pulse of investor sentiment, the Chicago Board Options Exchange Volatility Index or VIX, rocketed 23.95 percent higher to 30.69, the highest it has been since July.
The index, a 30-day risk forecast priced off of Standard & Poor's 500 index options, ran up sharply as U.S. stocks slumped on concerns about the sustainability of the economic recovery. The VIX often moves inversely to the underlying S&P 500 index as option premiums are raised.
'Investors are concerned about the outlook for the final two months of 2009 and there is an increased demand for portfolio insurance,' said WhatsTrading.com option strategist Frederic Ruffy.
The market's sell-off erased Thursday's gains, the best one-day move in three months, which were built on a better-than-expected gross domestic product report.
Behind the volatility is the resurfacing of economic worries reflected by mixed government data.
There are concerns that GDP, which grew at a 3.5 percent rate in the third quarter, may slip as government stimulus recedes and consumer demand remains sluggish.
'On the one hand, GDP numbers supported a recovery theme,' said Andrew Wilkinson, senior market analyst at Interactive Brokers Group. 'On the other hand, the economic growth is supported by consumption fueled by the government stimulus package. Thus, investors are worried over sustainability of both the recovery and the earnings-led rally.'
Heading into November, many investors took profits off the table.
According to quantitative strategists at Credit Suisse, an estimated 22 percent of mutual funds end their fiscal years at the end of October, and those managers may have moved to protect portfolios from sharp losses on the last day of their year.
A strong dollar and weaker commodities also infused much anxiety into the market.
'There is fear in the market as to whether the S&P 500 index can hold a significant 1,039 support level,' said Joe Kinahan, chief derivatives strategist at TD Ameritrade. 'If that breaks, we could be on a fast path down to the 1,000 level.'
Dan Deming, VIX options trader at options market making firm Stutland Equities, said, 'Nervous portfolio managers came after the November VIX call options, anticipating more volatility in the near term and sought put options in the S&P 500 and the SPDR S&P 500 exchange-traded fund,' said
According to option analytics firm Trade Alert, about 944,000 options in the S&P 500 index changed hands as puts outnumbered calls by a factor of 1.89. And in the SPDR S&P 500 , volume was double the norm with about 1.82 million puts and 736,000 calls traded, Trade Alert data show.
Meanwhile, the spot VIX outpaced VIX futures contracts across the board. November futures traded at a discount to VIX and was at 27.85 while December futures stood at 27.70.
'Traders could be buying S&P 500 options for protection and selling VIX futures as a hedge,' Deming said.
The volatility futures contracts could also suggest people do not foresee volatility remaining high. Although the VIX is back above 30, analysts expect it to come off those highs.
(Reporting by Doris Frankel; Editing by Kenneth Barry) 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.