US options risk gauge jumps on Greek, Portugal woes

* CBOE VIX jumps to its highest level since Feb

* VIX options call trade suggests more volatility

By Angela Moon and Doris Frankel

NEW YORK/CHICAGO, April 27 (Reuters) - Wall Street's favorite measure of investor anxiety, the Chicago Board Options Exchange Volatility Index .VIX, rose to its highest in over two months on Tuesday, suggesting greater stock swings ahead.

By late afternoon, the VIX jumped 17.8 percent to 20.58 after hitting an intraday high of 21.25, the highest since Feb. 25.

U.S. stocks also suffered their worst day since Feb. 4 after the credit ratings of both Greece and Portugal were cut, escalating worries about their sovereign debt.

Rating agency Standard and Poor's cut Greece's debt rating to below investment grade and also downgraded Portugal by two notches. For details see [ID:nLDE63P0LU].

The benchmark Standard & Poor's 500 index has run up around 76 percent from the 12-year lows in March last year.

"That run has caused many market participants to believe that there is more downside risk than upside potential in the market," said Jud Pyle, chief investment strategist at Options News Network, a division of option marketing firm PEAK6 Investments in Chicago.

"So when you get negative news like the Portuguese debt downgrade, it causes uncertainty, and that uncertainty is exemplified by the VIX."

Chris McKhann, analyst at Web information site optionMonster, said the equities market is expected to see more stock gyrations in coming weeks. McKhann looks at volatility in relation to what traders are expecting from futures and options which are priced off of futures on the VIX.

With the VIX at around 21.20, June VIX futures were higher and stood at 22.05, with rest of the board pricing in additional volatility through the end of year.

"Traders are definitely bidding up VIX call options, buying everything they can get their hands on," McKhann said.

One notable trade was the May 40 VIX calls which were bought at a premium for 25 cents, suggesting that the volatility index would potentially double within the next three weeks, he said. The last time the VIX traded above 40 was April 2009.

"It also appears an investor sold 25,000 VIX May 20 puts for $2.20 right before the market fell. This trade has already made money as the VIX jumped higher."

The VIX is a 30-day risk forecast priced off of S&P's 500 index option prices and generally moves inversely to the S&P benchmark index.

"There is plenty of uncertainty out there, and until the Greek financial situation and U.S. regulatory reform have more definitive answers, the 20 level in the VIX looks like it will part of the trading range for the rest of the summer," said TD Ameritrade chief derivatives strategist Joe Kinahan. (Editing by Kenneth Barry)