February 15, 2018 / 6:24 PM / 2 years ago

U.S. stock volatility shock wanes, VIX futures signal smoother sailing

NEW YORK (Reuters) - U.S. stocks may have recovered only about half the ground lost in the recent selloff, but traders in the derivatives market are fast dialing down their fears of more ructions.

Traders work on the floor of the New York Stock Exchange shortly after the opening bell in New York, U.S., February 15, 2018. REUTERS/Lucas Jackson

The CBOE Volatility Index .VIX, the most widely followed barometer of expected near-term volatility in the S&P 500 .SPX, while not quite back to where it was before last week's slump in equities, has retreated sharply from the high of 50.3 hit on Feb. 5.

The index was up 0.2 points at 19.46 on Thursday.

Investors’ fear of further losses for stocks has eased dramatically from last week, said Randy Frederick, vice president of trading and derivatives for Charles Schwab in Austin, Texas.

Still, investors are not as complacent as they were before the stock market correction, he said.

“When I see the VIX creeping a little higher today, even as equities are up, it tells me perhaps it overshot to the downside yesterday,” Frederick said.

The VIX futures curve, a snapshot of prices of futures contracts on the volatility index across different expirations, also painted a less fearful picture.

The curve moved into backwardation over the last two weeks, meaning investors were paying more for near-term insurance than for contracts that would protect them farther out in time. That rare situation highlighted the extreme level of fear of further near-term losses for U.S. stocks.

(Graphic: VIX futures signal smoother sailing - reut.rs/2C2VPPz)

On Wednesday the backwardation had reached its most extreme level since Aug. 11, 2011, when rating agency Standard & Poor’s downgraded the United States’ credit rating.

With Wednesday’s expiry of February VIX futures, the curve was approaching its more typical contango, where investors pay more for farther out contracts than for near-term contracts.

“Any time the front-month contracts expire, you immediately see a big adjustment in the curve,” said Frederick.

Wall Street surged on Thursday and was on track to end higher for a fifth straight session, led by Apple Inc (AAPL.O) and other technology stocks as investors shrugged off recent inflation worries.

Reporting by Saqib Iqbal Ahmed; Editing by Daniel Bases and Meredith Mazzilli

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