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Biggest VIX Drop Hides Options Bets S&P 500 Will Fall (Update1)
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By Michael Tsang, Rita Nazareth and Adam Haigh
July 6 (Bloomberg) -- The biggest drop in U.S. options prices since 1998 masks growing anxiety over the stock marketâs rebound, as traders pay more for bearish contracts than any time since before the failure of Lehman Brothers Holdings Inc.
Investors are spending the most since August 2008 to protect against a 10 percent decline in the Standard & Poorâs 500 Index versus wagers on an advance, according to data compiled by Bloomberg. Thatâs one month prior to New York-based Lehmanâs bankruptcy. The premium on so-called put contracts increased even after the Chicago Board Options Exchange Volatility Index, a gauge of U.S. options prices known as the VIX, fell 40 percent last quarter.
Traders are locking in gains on the S&P 500, which rose as much as 40 percent since March, on concern the worst U.S. recession in a half century isnât abating, according to Huntington Asset Management, BlackRock Inc. and Fiduciary Trust Co. The widening gap between bullish and bearish options belies the VIXâs retreat to below its level when Lehman collapsed and comes as U.S. companies prepare to report second-quarter earnings this week.
âToo many people are thinking the worst is over, life gets better from here,â said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset in Cincinnati. âWeâre scratching our heads, going, âSomething doesnât feel right here.â Itâs probably better to have some insurance on the books.â
Pay-Off Price
Sorrentino, who expects the S&P 500 to retreat more than 10 percent from last weekâs closing price of 896.42, said he bought options that pay off if the index declines to 775 in December. The âstrike price,â or the level at which Sorrentino can exercise the contract, implies a 14 percent slump.
The S&P 500 fell 2.5 percent since June 26, the third straight weekly drop, after a worse-than-projected decrease in employment added to concern that rising joblessness will prolong the recession. Futures on the index lost 0.9 percent as of 10:29 a.m. in London today.
After losing almost $11 trillion during a 17-month bear market, U.S. equities have recouped 24 percent of their value since March 9 on speculation that corporate profits will rebound by year-end as economic growth resumes.
The S&P 500 climbed 15 percent in the second quarter, the biggest advance in a decade, as the government and Federal Reserve pledged $12.8 trillion to combat almost $1.5 trillion in losses at the worldâs largest financial companies.
The rebound caused traders to pay less for options and pushed down the VIX, a measure of the S&P 500âs âimplied volatility,â or expected price swings. It fell to a low of 25.35 on June 29 from 44.14 on March 31.
Not Normal
The reading indicates a 68 percent likelihood the S&P 500 will fluctuate as much as 7.3 percent in the next 30 days, according to data compiled by Bloomberg. That compares with the VIXâs all-time high of 80.86 in November, when traders priced in a swing of 23 percent in the S&P 500. .......continued below
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAIJo685vdz4
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By Michael Tsang, Rita Nazareth and Adam Haigh
July 6 (Bloomberg) -- The biggest drop in U.S. options prices since 1998 masks growing anxiety over the stock marketâs rebound, as traders pay more for bearish contracts than any time since before the failure of Lehman Brothers Holdings Inc.
Investors are spending the most since August 2008 to protect against a 10 percent decline in the Standard & Poorâs 500 Index versus wagers on an advance, according to data compiled by Bloomberg. Thatâs one month prior to New York-based Lehmanâs bankruptcy. The premium on so-called put contracts increased even after the Chicago Board Options Exchange Volatility Index, a gauge of U.S. options prices known as the VIX, fell 40 percent last quarter.
Traders are locking in gains on the S&P 500, which rose as much as 40 percent since March, on concern the worst U.S. recession in a half century isnât abating, according to Huntington Asset Management, BlackRock Inc. and Fiduciary Trust Co. The widening gap between bullish and bearish options belies the VIXâs retreat to below its level when Lehman collapsed and comes as U.S. companies prepare to report second-quarter earnings this week.
âToo many people are thinking the worst is over, life gets better from here,â said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset in Cincinnati. âWeâre scratching our heads, going, âSomething doesnât feel right here.â Itâs probably better to have some insurance on the books.â
Pay-Off Price
Sorrentino, who expects the S&P 500 to retreat more than 10 percent from last weekâs closing price of 896.42, said he bought options that pay off if the index declines to 775 in December. The âstrike price,â or the level at which Sorrentino can exercise the contract, implies a 14 percent slump.
The S&P 500 fell 2.5 percent since June 26, the third straight weekly drop, after a worse-than-projected decrease in employment added to concern that rising joblessness will prolong the recession. Futures on the index lost 0.9 percent as of 10:29 a.m. in London today.
After losing almost $11 trillion during a 17-month bear market, U.S. equities have recouped 24 percent of their value since March 9 on speculation that corporate profits will rebound by year-end as economic growth resumes.
The S&P 500 climbed 15 percent in the second quarter, the biggest advance in a decade, as the government and Federal Reserve pledged $12.8 trillion to combat almost $1.5 trillion in losses at the worldâs largest financial companies.
The rebound caused traders to pay less for options and pushed down the VIX, a measure of the S&P 500âs âimplied volatility,â or expected price swings. It fell to a low of 25.35 on June 29 from 44.14 on March 31.
Not Normal
The reading indicates a 68 percent likelihood the S&P 500 will fluctuate as much as 7.3 percent in the next 30 days, according to data compiled by Bloomberg. That compares with the VIXâs all-time high of 80.86 in November, when traders priced in a swing of 23 percent in the S&P 500. .......continued below
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aAIJo685vdz4
I just saw an excellent, insightful film by trend following supporter Mike Covel. Broke--the new american dream--- it's a well done expose' on how the USA got in the financial mess and offers quasi solutions to the problem. I would reccomend the film to you and perhaps your less financial savvy friends/neighbors.
http://edge.affiliateshop.com/public/AIDLink?AID=103735&BID=13213
follow us on twitter www.twitter.com/marketsurfer
http://edge.affiliateshop.com/public/AIDLink?AID=103735&BID=13213
follow us on twitter www.twitter.com/marketsurfer
8207--8173 YM the neo channel.
remember, flat in middle, short below, flat above.
very tight, highly bearish right now
good luck!
surf
remember, flat in middle, short below, flat above.
very tight, highly bearish right now
good luck!
surf
staying flat right now
did not break upper line by parameters, FLAT
real time updates www.twitter.com/marketsurfer
see you at close!
did not break upper line by parameters, FLAT
real time updates www.twitter.com/marketsurfer
see you at close!
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marketsurferdoubling down into YM shorts, VIX not confirming, SHORT
less than 5 seconds ago from web
break even @ 8200 YM --adding to shorts, VIX not confirming rally, expect down close.
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marketsurferdoubling down into YM shorts, VIX not confirming, SHORT
less than 5 seconds ago from web
break even @ 8200 YM --adding to shorts, VIX not confirming rally, expect down close.
doubled down at 8235--- very confident of meltdown.
holding shorts, break even 8200
holding shorts, break even 8200
in addition, the film has a series of interviews of top money managers which makes it truly a unique work.
surf
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