VIX Poised for Record Drop As Stable Oil Ignites Stocks: Options
By Joseph Ciolli and Callie Bost
(Bloomberg) — For U.S. stock investors, threats that
looked poised to swallow the bull market a month ago are already
fading from memory.
Prices for options that protect against declines in the
Standard & Poor?s 500 Index are falling twice as quickly as they
rose at the beginning of the year. The Chicago Board Options
Exchange Volatility Index has slid 34 percent in February, on
track for its biggest monthly drop on record after it jumped as
much as 17 percent in January.
A Greek bailout deal and speculation that the worst is over
for oil have assuaged investor concerns and calmed stock prices.
Meanwhile, speculation that interest rates will rise in the
first half of the year was damped by the Federal Reserve?s
assurances it will be ?patient? in changing policy, even as
the U.S. economy shows signs of improving.
?Some of the headaches for investors have eased and that?s
allowed them to focus on the optimistic part — the economic
outlook — which should prove constructive for equity prices,?
Bruce McCain, who helps oversee more than $25 billion as chief
investment strategist at the private-banking unit of KeyCorp in
Cleveland, said in a phone interview. ?Sentiment has certainly
become more positive.?
The S&P 500 has climbed 6 percent in February, headed for
its biggest monthly gain since October 2011, after sliding 3.1
percent in January. The U.S. benchmark gauge has posted average
daily swings of 0.51 percent in February, almost half the rate
of last month?s.
Nasdaq Hedges
Traders purchase options on the VIX as insurance against
share losses because the volatility gauge usually rises as
stocks fall. The VIX, a measure of S&P 500 options prices, has
dropped 47 percent since reaching a more than two-year high in
October.
Investors? preference for less protection has also extended
to other benchmark gauges as the Nasdaq Composite Index climbed
toward its dot-com-era record reached in March 2000. The Nasdaq
measure has rallied 7.2 percent in February, heading for its
best month in three years.
The CBOE?s gauge of expectations for future volatility on
the Nasdaq 100 Index, which consists of the composite gauge?s
largest non-bank stocks, is down 33 percent in February. That
would be its biggest monthly decline since October 2011.
?A lot the things that brought the market down initially
have stabilized,? Stephen Solaka, managing partner of Belmont
Capital Group in Los Angeles, which oversees about $225 million
in assets, said in a phone interview. ?We started making new
highs and the Fed speak seemed to be soothing the market.?
Fed Commentary
Fed Chair Janet Yellen said in testimony before the Senate
Banking Committee on Tuesday that a change in the Fed?s guidance
on interest rates won?t lock it into a timetable for tightening.
She repeated that the Fed?s pledge to be patient relating to a
rate increase means an increase is unlikely for ?at least the
next couple? of meetings.
Some big investors in VIX futures are betting the market?s
calm won?t last. Hedge funds and other large speculators in the
contracts have owned more bets on higher volatility relative to
lower turbulence since the week ended Jan. 13, Commodity Futures
Trading Commission data show. These managers held about 106,000
long positions in the contracts and 99,000 short ones, data
through Feb. 17 show.
In a report Tuesday, Weeden & Co. chief global strategist
Michael Purves noted that the VIX is trading well below
historical levels and may be due for a rebound. The volatility
gauge closed yesterday at 13.84, 31 percent below its all-time
average.
?Long story short, current VIX levels should not trend too
much lower,? Purves said.
Data Reports
Recent economic data that beat estimates have helped
contribute to a reduction in stock price swings. Employers in
the U.S. added more jobs than forecast in January, capping the
biggest three-month gain in 17 years, and workers? earnings
jumped. At the same time, oil has rebounded almost 6 percent in
February, while concerns over Greece and Ukraine have eased.
The combination of economic strength and settling
geopolitical headwinds makes the U.S. less vulnerable than other
global markets when it comes to any kind of macroeconomic shock,
according to Kevin Divney of Beaconcrest Capital Management LLC.
With the market showing less concern over downside risk for U.S.
stocks, investors are now free to focus on picking individual
stocks or sectors, he said.
?When the VIX does trend lower as it has, you start to see
stocks pricing more on fundamentals and less on the aggregate
market,? Divney, chief investment officer at Beaconcrest, said
in a phone interview. ?The disentangling of a stock?s return to
be more about the fundamentals and less about the macro
environment is how you make money in the stock market in the
long run.?