Options protecting against declines in U.S. energy stocks have surged to the most-expensive level in 30 months versus contracts on the Standard & Poor’s 500 Index, amid concern oil will extend losses as the economy slows.
Implied volatility for three-month options on the Energy Select Sector SPDR exchange-traded fund is 12.5 points more than the level for the SPDR S&P 500 ETF Trust and almost double the average since March 2009, according to data compiled by Bloomberg. For Exxon Mobil Corp. (XOM), the world’s largest publicly traded oil company, bearish options are trading at the highest level relative to bullish ones since November 2008.
Energy companies have helped lead the S&P 500 lower amid speculation the European debt crisis will curb demand for fuel. Analysts estimate the group will post the third-slowest increase in profit next year among 10 industries in the stock index, and price-earnings ratios for the group have sunk to the lowest levels versus the S&P 500 since 2009. Oil sank to a one-year low of $74.95 a barrel yesterday.
“It’s a pure play on the commodity, and the thinking is with a dramatic slowdown in growth, there will be a collapse in demand,” Jack Ablin, who helps oversee $55 billion as chief investment officer for Chicago-based Harris Private Bank, said in a telephone interview yesterday. “The sentiment is really that we don’t know if there’s going to be a recession and so there’s not a lot of demand for those stocks right now.”
Peak in April
Energy stocks in the S&P 500 have retreated 26 percent since April 29, when the stock index peaked and crude oil climbed to the highest level since September 2008. That’s the third-biggest decline among 10 groups. Losses accelerated after July 22, the S&P 500’s high point before S&P cut the U.S. government’s credit rating.
Oil futures tumbled 17 percent in the third quarter for the worst performance since the last three months of 2008, adding to the 11 percent decline during the second quarter. Brent crude slumped 12 percent during the past six months.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, tumbled 10 percent to 40.82 yesterday for the biggest decline since Aug. 26. It extended losses after the S&P 500 surged 4.1 percent in the final 50 minutes of trading. The volatility gauge dropped 6.7 percent to 38.08 as of 2:52 p.m. in New York today. The VStoxx Index, which tracks options on the Euro Stoxx 50 Index, fell 9.6 percent, its biggest loss in more than a month, to 45.6 today.
Implied volatility for Exxon Mobil options priced 10 percent below the stock price on Oct. 3 was 11.1 more than contracts 10 percent above the shares, the highest level for the relationship known as skew since December 2008, according to data compiled by Bloomberg. The Irving, Texas-based company then had the fourth-biggest skew among the 30 Dow Jones Industrial Average companies, the data show.
‘Gets Much Worse’
“Downside puts have been very well bid in many large-cap energy names as investors look to limit their risk in a world where the macroeconomic environment gets much worse,” Max Kaplan, the senior energy stock options trader at Barclays Plc in New York, said in a telephone interview yesterday. “The options markets are starting to price in some probability that that could happen.”
Profit growth for S&P 500 energy companies will slow to 8 percent next year from 40 percent in 2011, according to the average analyst estimates in a Bloomberg survey. The group trades for 10.4 times reported profit, or 15 percent less than the multiple for the stock index and 43 percent lower than the industry’s average price-earnings ratio since 1992, according to data compiled by Bloomberg.
“Energy and commodities are trading more in line with the idea that we’re going to back in a recession,” Peter Cecchini, chief equity derivatives strategist at New York-based Cantor Fitzgerald LP, said in a telephone interview yesterday. “The risk trade is off.”
International investors expect the world economy will contract, with more than one in three forecasting a global economic recession within the next year, according to a Bloomberg Global Poll conducted Sept. 26. The International Monetary Fund lowered its forecast for global growth last month and predicted “severe” repercussions if Europe fails to contain its debt crisis.
Chinese Premier Wen Jiabao’s government is seeking to defuse the fastest gains in consumer prices since 2008 without a collapse in China’s growth, the strongest among the major economies. Twelve percent of global investors in the Bloomberg poll last week predicted growth in China will slow to less than 5 percent within a year, a pace unseen in the past two decades.
The International Energy Agency cut global oil demand forecasts last month. The Paris-based adviser reduced its estimate for 2012 consumption by 400,000 barrels a day, and for 2011 by 200,000 a day. Worldwide demand will rise by 1.2 percent to 89.3 million barrels a day this year and by 1.6 percent to 90.7 million next year.
“I can’t see that oil is going to collapse,” Michael Bristow, head of institutional options trading at VT Brokers LLC in San Francisco, said in a phone interview yesterday. “With worldwide consumption going higher, the commodity will trade on a longer-term upward trend. And if the recovery does start to take off you’ll see oil and energy move up.”
Seven of the 10 contracts on the Energy Select Sector SPDR with the biggest increase in open interest in the past week are bearish, Bloomberg data show. Those include December $60 puts, March $55 puts and March $35 puts. The ETF rose 3.3 percent to $58.37 yesterday.
“Energy-sector stocks are notorious for moving together, so that tends to make the index more volatile,” Chicago-based Christopher Rich, head options strategist at JonesTrading Institutional Services LLC, said in a telephone interview. “If all of a sudden a stock gets cut in half, you have to re-price your volatility because this thing is scarier and riskier than you thought.”
To contact the reporters on this story: Cecile Vannucci in Amsterdam at firstname.lastname@example.org; Jeff Kearns in New York at email@example.com; Whitney Kisling in New York at firstname.lastname@example.org