* S&P 500 historical volatility rising
* VIX futures trade in 25 range for 2010
* Traders seek ETF put options as likely protection
(Recasts lead, Adds details on ETF option volume in paragraph
By Doris Frankel
CHICAGO, Feb 4 Volatility has vaulted out of
The worst sell-off in U.S. stocks in more than nine months
on Thursday sent Wall Street's favorite measure of investor
anxiety, the Chicago Board Options Exchange Volatility Index
.VIX, sharply higher as investors scrambled to buy portfolio
The index, known as the VIX, jumped nearly 21 percent to
26.08 as U.S. stocks sank amid persistent fears over European
sovereign debt problems and an unexpected increase in U.S.
jobless claims a day ahead of crucial payrolls data.
"Investors are clamoring for protection," said Ryan
Renicker, equity derivatives strategist at broker-dealer
"The risks associated with sovereign debt and the
uncertainty coming into Friday's jobs report have prompted
investors to hedge their stock positions by buying put options
on the S&P 500 and VIX call options."
Since topping out at a 28 reading on Jan. 22, the VIX had
been trending lower over the past two weeks. But it reversed
course violently on Thursday, indicating expectations for
future daily moves of 1.5 percent in the S&P 500.
The VIX is a 30-day risk forecast priced off of Standard &
Poor's index .SPX option prices and often moves higher when
the S&P benchmark falls sharply as investors bid up options to
manage their stock market risk.
Investors are concerned that stocks will keep falling in
the near term. "Even in the exchange-traded funds that track
major stock benchmarks and sectors, investors are aggressively
buying insurance," said optionMonster analyst Chris McKhann.
Another big driver is the actual volatility in the market,
which has been rising. S&P 500 historical volatility over the
past 22 trading days stood at 18.71 percent up from 16.5
percent the previous day, Renicker said.
Over the last 16 trading days, the S&P 500 has moved more
than 1 percent on 10 of those days, according to Bespoke
Investment Group, an investment firm in Harrison, New York.
VIX futures are trading in the 25 range, also suggesting
that traders are looking for wider stock market swings at least
for the next six months, McKhann said.
BUSY ACTION IN ETF PUTS
Many traders expecting downside movement turned to
exchange-traded funds tracking the major benchmarks and sectors
to hedge risk.
In the ETFs, about 3.40 million puts and 2.19 million calls
traded, or 130 percent the recent average daily turnover. By
contrast 609,000 puts and 559,000 calls changed hands across
all the cash indexes, which represents approximate typical
levels, according to option analytics firm Trade Alert.
The action shows that increasing numbers of investors are
turning to ETF puts rather than index puts when hedging bets on
volatility days, said WhatsTrading.com options strategist Fred
Volume leaders were the SPDR S&P 500 ETF Trust (SPY.P),
Powershares QQQ Trust Series 1 fund QQQQ.O, the iShares
Russell 2000 Index (IWM.P), the iShares MSCI Emerging Markets
Index (EEM.P). and the Select Sector SPDR Financial fund
Put-to-call ratios in the QQQQs, IWM, XLF and EEM are twice
their recent average, said McKhann.
Some traders have already employed their hedging and risk
strategies. Options bets initiated last month in several ETFS
suggested traders were positioning for a substantial pullback
in the consumer, basic materials, banks and retail sectors by
March expiration. For details, please see [nN22145195].
(Editing by Diane Craft and Leslie Adler)