Players seek safety in financial ETFs, VIX rises

By Doris Frankel

CHICAGO (Reuters) - Many cautious investors on Thursday snapped up options tied to several exchange-traded funds tracking the performance of the financial sector on the view that stocks in that sector could suffer more pain.

At the same time, the decline in U.S. stocks, led by the financials, sent the Chicago Board Options Exchange Volatility Index, Wall Street's main barometer of investor fear, higher and to levels near last Friday's 24.05 close.

The VIX rose 10 percent to 23.44, ending the trading session above its 200-day moving average of 23.20.

"Today's sell-off came amid mixed earnings news and uninspiring economic data early," said option strategist Frederic Ruffy at Web information site WhatsTrading.com.

The sell-off, led by banks and brokerages, began in earnest after data from the National Association of Realtors showed June sales of existing homes hit a 10-year low.

The VIX, which tracks projected stock market volatility embedded in near-term Standard & Poor's 500 index options, typically moves inversely to the S&P benchmark.

It often rises reflecting investors' angst and their inclination to buy options to manage stock market risk.

"Housing and credit concerns knocked the market lower today and confirmed that the short-term bounce in stocks could not be sustained," said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.

As a result, some investors purchased put options to hedge their long positions while others speculated that the market could suffer more losses. Although fear has returned, there was no evidence of a panic to buy options, Fullman added.

OPTION BEARS IN ETFS

The bearish mood among option traders was apparent in several ETFs tracking the financial sector.

Option volume was two times the normal level in the ProShares UltraShort Financials fund, a contrarian ETF that performs inversely to the broader financial market.

SKF shares jumped 11.81 percent to $130.70 as financial stocks stumbled. The fund seeks to double the opposite of the daily performance of the Dow Jones U.S. Financials Index.

In the options market, investors often turn to calls in the fund if they are bearish on the financial sector and anticipate its shares to go higher.

According to option analytics firm Trade Alert, about 39,000 calls changed hands vs. 11,000 puts, suggesting some traders may be using the fund to protect their positions in the financial space, an analyst said.