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Friday, 31 October 2008
VIX Options Index Drops to Lowest in a Week After GDP Report
“Fifty-nine is a really low number given the depth of the market’s decline,” Price said. “It tells you we haven’t seen the final bottom or capitulation. When there’s a lack of fear, as there is now, that’s when you should worry.”
VIX Options Index Drops to Lowest in a Week After GDP Report
By Jeff Kearns 30 October 2008
(Bloomberg) – The benchmark index for U.S. stock options fell to the lowest in more than a week after the economy contracted less than economists estimated and investors speculated global interest-rate cuts will stem a further slump.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, lost 10 percent to 62.90. It measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which rallied 2.6 percent.
“There was nothing particularly worse than expected in the economic data,” said Jeremy Wien, a VIX options trader at Societe Generale SA in New York. “We’ve had a slow, quiet rally, which tends to send near-term volatility lower.”
The VIX rose yesterday to the fourth-highest close in its 18-year history, surging in the final minutes of trading as the S&P 500 reversed a 3.1 percent rally to end the day down 1.1 percent.
Gross domestic product contracted at a 0.3 percent pace from July to September, the Commerce Department said today. The drop was smaller than the median economist estimate for a 0.5 percent decline. Hong Kong joined the U.S. in lowering borrowing costs and the Federal Reserve provided $120 billion to spur lending in emerging markets.
‘More Confident’
“The steps the central banks are taking are helping the equity markets remove some of the volatility,” Richard Canlione, a futures and options trader at MF Global Inc. in Chicago, said in a Bloomberg Television interview. “You have to be cautious but we are starting to see institutional investors start to get more confident about the market.”
Before September, this year’s highest close for the VIX was on March 17, when the gauge jumped to a five-year high of 32.24 a day after the Fed-led rescue of Bear Stearns Cos. The VIX never closed above 50 before October.
The CBOE’s Equity Put-Call Ratio, which tracks the total number of existing stock options trading on the exchange, dropped to 0.59 yesterday. That was the lowest level since it fell to a nine-month low of 0.51 on Sept. 19.
The drop may signal that stocks will fall because the gauge is a contrarian indicator, according to Price Headley, founder of BigTrends.com, a Lexington, Kentucky-based firm that advises investors on options-trading strategies. The S&P 500 has lost 36 percent in 2008.
‘You Should Worry’
“Fifty-nine is a really low number given the depth of the market’s decline,” Price said. “It tells you we haven’t seen the final bottom or capitulation. When there’s a lack of fear, as there is now, that’s when you should worry.”
Ten days after the previous low, the S&P 500 tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system.
This month’s stock and index options expire at the close of trading Aug. 15. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.
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VIX Options Index Drops to Lowest in a Week After GDP Report
By Jeff Kearns
30 October 2008
(Bloomberg) – The benchmark index for U.S. stock options fell to the lowest in more than a week after the economy contracted less than economists estimated and investors speculated global interest-rate cuts will stem a further slump.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, lost 10 percent to 62.90. It measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which rallied 2.6 percent.
“There was nothing particularly worse than expected in the economic data,” said Jeremy Wien, a VIX options trader at Societe Generale SA in New York. “We’ve had a slow, quiet rally, which tends to send near-term volatility lower.”
The VIX rose yesterday to the fourth-highest close in its 18-year history, surging in the final minutes of trading as the S&P 500 reversed a 3.1 percent rally to end the day down 1.1 percent.
Gross domestic product contracted at a 0.3 percent pace from July to September, the Commerce Department said today. The drop was smaller than the median economist estimate for a 0.5 percent decline. Hong Kong joined the U.S. in lowering borrowing costs and the Federal Reserve provided $120 billion to spur lending in emerging markets.
‘More Confident’
“The steps the central banks are taking are helping the equity markets remove some of the volatility,” Richard Canlione, a futures and options trader at MF Global Inc. in Chicago, said in a Bloomberg Television interview. “You have to be cautious but we are starting to see institutional investors start to get more confident about the market.”
Before September, this year’s highest close for the VIX was on March 17, when the gauge jumped to a five-year high of 32.24 a day after the Fed-led rescue of Bear Stearns Cos. The VIX never closed above 50 before October.
The CBOE’s Equity Put-Call Ratio, which tracks the total number of existing stock options trading on the exchange, dropped to 0.59 yesterday. That was the lowest level since it fell to a nine-month low of 0.51 on Sept. 19.
The drop may signal that stocks will fall because the gauge is a contrarian indicator, according to Price Headley, founder of BigTrends.com, a Lexington, Kentucky-based firm that advises investors on options-trading strategies. The S&P 500 has lost 36 percent in 2008.
‘You Should Worry’
“Fifty-nine is a really low number given the depth of the market’s decline,” Price said. “It tells you we haven’t seen the final bottom or capitulation. When there’s a lack of fear, as there is now, that’s when you should worry.”
Ten days after the previous low, the S&P 500 tumbled the most since the 1987 crash after the House of Representatives rejected a $700 billion plan to rescue the financial system.
This month’s stock and index options expire at the close of trading Aug. 15. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.
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