May 8 (Bloomberg) -- Options traders are increasing wagers that the Standard & Poor’s 500 Index’s 37 percent rally in the past two months is coming to an end.

Futures on the Chicago Board Options Exchange Volatility Index are priced above the gauge’s current level, according to data compiled by Bloomberg. The so-called VIX, which measures the cost of using the options as protection against market declines, has dropped 20 percent this year.

Dealers are charging more for insurance after better-than- estimated corporate profits at companies ranging from American Express Co. to Ford Motor Co. and economic reports on home sales and durable goods sent the S&P 500 to its steepest eight-week rally since 1938. Now, the so-called term structure shows higher prices for VIX futures expiring in the next six months.

“It’s fascinating, I’ve never seen anything like it,” said Dean Curnutt, president of Macro Risk Advisors LLC, a New York-based brokerage that specializes in equity options. “You’ve never seen the VIX term structure so high and so flat at the same time.”

Investors surveyed by Macro Risk Advisors expect the VIX to jump to as much as 51.70 by year end, more than double the 20.09 average of its 19-year history. The index won’t fall below 28.1 and the S&P 500 will end the year at 834, according to the average estimates in Curnutt’s survey of 75 money managers and traders at hedge funds, insurance companies and pensions.

‘Considerable Comfort’

The S&P 500 added 2.4 percent to 929.23 after Federal Reserve Chairman Ben S. Bernanke said a review of banks’ health “should provide considerable comfort” and a report showing fewer job losses than forecast. The VIX fell 4.2 percent to 32.05, the lowest since Sept. 16, and slipped as low as 31.19, below its close on the day that Lehman Brothers Holdings Inc. filed for bankruptcy.

The VIX never exceeded 50 before Lehman’s collapse in September. It topped 40 after WorldCom Inc.’s 2002 bankruptcy, the Sept. 11 terrorist attacks, Long-Term Capital Management’s collapse in 1998 and the Asian financial crisis in 1997.

The S&P 500’s rally restored more than $2 trillion to U.S. equity markets. The U.S. benchmark index remains 41 percent below its record 1,565.15 reached Oct. 9, 2007.

Options are contracts that give the right though not the obligation to buy or sell a security at a set price and date.

The U.S. volatility benchmark, derived from S&P 500 contracts that expire in 30 days, has decreased 9.2 percent this week, the biggest drop in six weeks. The VIX has averaged 42.56 this year.

‘Really Unusual’

May futures slipped 4.5 percent to 32.20. All contracts expiring between now and November declined and closed between 32.20 and 33.40. The difference between the highest and lowest futures contracts was 1.2, widening from 0.65 yesterday.

“That’s really unusual,” said Ben Londergan, co-chief executive of Group One Trading, the primary market maker for VIX options. “People are saying, ‘Whatever happens today is setting my expectations for the year.’”

The VIX has retreated 60 percent since soaring to a record 80.86 on Nov. 20. Before today, it hadn’t had a 2009 close below the levels it reached when Bear Stearns Cos. collapsed in March 2008. The measure closed at 32.24 after the Federal Reserve helped New York-based JPMorgan Chase & Co. buy Bear Stearns.

‘Still Nervous’

“People are still nervous about the direction of the market, and they believe we’ll remain in a high-volatility environment,” said Samer Nsouli, chief investment officer at Lyford Group International, a New York-based hedge fund that oversees $65 million. Nsouli said he’s using options and futures to wager U.S. stocks will drop.

Jobless claims dropped by 34,000 to 601,000 in the week ended May 2, the Labor Department said yesterday. That’s still higher than 98 percent of all weekly reports since 1967, according to an analysis by Bespoke Investment Group LLC, a Harrison, New York-based firm that manages money for wealthy investors and provides financial research to institutions.

“There remains an abundance of caution,” said Carl Mason, head of U.S. equity derivatives strategy at BNP Paribas in New York. “People are worried about the rest of the year and we do see people buying longer-dated volatility and longer-dated options.”

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.

Last Updated: May 8, 2009 17:23 EDT