Tension Runs High In VIX As Stock Insurance Costs Most Since ?06
Speculators? appetite for protection from stock-market tempests has reached the highest in nine years.
Options predicting a rise in the Chicago Board Options Exchange Volatility Index are the most expensive since 2006 relative to those betting on a drop. With gains narrowing, investors are hedging through calls on the VIX, which usually rises as the Standard & Poor?s 500 Index falls.
?Although the broader indexes have been performing reasonably well and there hasn?t been a big selloff yet, there are certain industry groups failing,? said Steve Sosnick, an equity risk manager at Timber Hill, the market-making unit of Greenwich, Connecticut-based Interactive Brokers Group Inc. ?The market has acted poorly on many measures.?
Contracts on the VIX are one of the main instruments investors use to protect stock holdings. They currently own 5.9 million VIX calls, which appreciate as S&P 500 volatility increases, and 2 million puts, which gain value as the market calms.
Storm Protection
Traders bid up protection on the fear gauge last week as U.S. stocks declined, with the Dow Jones Industrial Average posting its worst losing streak in four years. Last week, options betting on a 10 percent rise in the VIX cost 19.1 points more than puts with strike prices 10 percent below the VIX?s level, three-month data compiled by Bloomberg show. That?s the widest spread since July 2006.