By Doris Frankel
CHICAGO, Dec 22 (Reuters) - The VIX, Wall Street's favorite measure of investor anxiety, ended Tuesday at the lowest levels since before last year's implosion of Lehman Brothers sparked the worst financial crisis in more than 70 years.
The decline in the Chicago Board Options Exchange Volatility Index, which came as the Standard & Poor's 500 index hit a 14-month closing high, underscores how the fear that gripped markets throughout late 2008 and early 2009 has dissipated in favor of a sunny outlook for 2010.
'As investors gear up for year-end, they only see good things for the first quarter of 2010 and, as such, see fewer swings in the stock market,' said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.
The VIX, a 30-day risk forecast conveyed by S&P 500 index option prices, fell below a key psychological reading of 20 to close at 19.54, its lowest closing level since Aug. 28, 2008.
The S&P, meanwhile, rose to its highest close since October 2008, at 1,120.27 points, as U.S. stocks climbed amid increasing optimism about the economic recovery in a shortened holiday week marked by low volume.
In addition to the 2009 high for the S&P 500, 'the fresh catalyst is a resurgence in government bond yields, which confirms investors lack of need for the safety offered by fixed income,' Wilkinson added.
Treasury prices fell, boosting the 10-year Treasury note's yield to 3.75 percent. At one point the yield rose to 3.77 percent, the highest since Aug. 13.
Also weighing on the VIX was the gap between future volatility and realized volatility, which tracks the past daily gyrations for the S&P 500.
On a relative basis, the VIX is still high compared to the 20-day realized volatility for the S&P 500, which stood at 13 percent. This means 'traders can profitably sell options as long as the VIX outpaces realized volatility,' said optionMonster analyst Chris McKhann.
In addition, there are only five and a half trading days left for the year. Thursday will see a shortened session, and markets are closed this Friday for Christmas and the next Friday for New Year's, causing options to reprice due to time erosion, one element of an option's value.
'So investors are less likely to buy (option) premium due to time decay during this period,' said WhatsTrading.com option strategist Frederic Ruffy.
In fact, there is very little hedging activity going on, Ruffy said. About 150,000 puts traded on the S&P 500, or about 37 percent of typical volume, according to option analytics firm Trade Alert, contributing to low volatility.
'Many traders have already employed their end-of-year hedging and risk strategies with options and some have closed their books for the remainder of the year,' said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.
VIX futures, however, are predicting higher volatility down the road. January futures traded at 22.65 while February VIX futures stood at 25.10 and March futures were at 25.60.
'The VIX futures are trading at a premium to spot VIX, suggesting that investors believe volatility will return within the next month,' optionMonster's McKhann said.
(Editing by Leslie Adler) Keywords: USA MARKETS/CBOE VOLATILITY/INDEX (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, Dec 22 (Reuters) - The VIX, Wall Street's favorite measure of investor anxiety, ended Tuesday at the lowest levels since before last year's implosion of Lehman Brothers sparked the worst financial crisis in more than 70 years.
The decline in the Chicago Board Options Exchange Volatility Index, which came as the Standard & Poor's 500 index hit a 14-month closing high, underscores how the fear that gripped markets throughout late 2008 and early 2009 has dissipated in favor of a sunny outlook for 2010.
'As investors gear up for year-end, they only see good things for the first quarter of 2010 and, as such, see fewer swings in the stock market,' said Andrew Wilkinson, senior market analyst at Interactive Brokers Group.
The VIX, a 30-day risk forecast conveyed by S&P 500 index option prices, fell below a key psychological reading of 20 to close at 19.54, its lowest closing level since Aug. 28, 2008.
The S&P, meanwhile, rose to its highest close since October 2008, at 1,120.27 points, as U.S. stocks climbed amid increasing optimism about the economic recovery in a shortened holiday week marked by low volume.
In addition to the 2009 high for the S&P 500, 'the fresh catalyst is a resurgence in government bond yields, which confirms investors lack of need for the safety offered by fixed income,' Wilkinson added.
Treasury prices fell, boosting the 10-year Treasury note's yield to 3.75 percent. At one point the yield rose to 3.77 percent, the highest since Aug. 13.
Also weighing on the VIX was the gap between future volatility and realized volatility, which tracks the past daily gyrations for the S&P 500.
On a relative basis, the VIX is still high compared to the 20-day realized volatility for the S&P 500, which stood at 13 percent. This means 'traders can profitably sell options as long as the VIX outpaces realized volatility,' said optionMonster analyst Chris McKhann.
In addition, there are only five and a half trading days left for the year. Thursday will see a shortened session, and markets are closed this Friday for Christmas and the next Friday for New Year's, causing options to reprice due to time erosion, one element of an option's value.
'So investors are less likely to buy (option) premium due to time decay during this period,' said WhatsTrading.com option strategist Frederic Ruffy.
In fact, there is very little hedging activity going on, Ruffy said. About 150,000 puts traded on the S&P 500, or about 37 percent of typical volume, according to option analytics firm Trade Alert, contributing to low volatility.
'Many traders have already employed their end-of-year hedging and risk strategies with options and some have closed their books for the remainder of the year,' said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.
VIX futures, however, are predicting higher volatility down the road. January futures traded at 22.65 while February VIX futures stood at 25.10 and March futures were at 25.60.
'The VIX futures are trading at a premium to spot VIX, suggesting that investors believe volatility will return within the next month,' optionMonster's McKhann said.
(Editing by Leslie Adler) Keywords: USA MARKETS/CBOE VOLATILITY/INDEX (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.