Volatility Indexes Surge as Greek Bailout Vote Roils Markets

Volatility indexes surged, giving the benchmark European measure the biggest two-day jump since May 2010, after Greece’s decision to schedule a vote on the region’s bailout spurred concern the nation will default.

The VStoxx Index (V2X), which measures the cost of Euro Stoxx 50 Index options, rose 22 percent to 42.96, extending its two-day increase to 37 percent. The Chicago Board Options Exchange Volatility Index, or VIX, soared 16 percent to 34.77 today, bringing its two-day gain to 42 percent.

Gauges of market fear are jumping as speculation about Europe’s debt crisis drowns out earnings and economic news. Germany’s DAX Index rose or fell 3.4 percent on average during the past four days while the Dow Jones Industrial Average’s average intraday move has exceeded 250 points since Oct. 26.

“The market doesn’t like unknowns, and the situation in Greece today was a definite unknown,” Stephen Solaka, who oversees about $50 million including options as co-founder of Belmont Capital Group in Los Angeles, said in a telephone interview. “Bad news is OK, as long as it’s known. Unknown news or surprises cause issues, cause sell-offs and fears to appear. Fear is back on the table.”

Volatility indexes are rising again after plunging in October. The VIX dropped 30 percent, the most since July 2010, while the VStoxx retreated 25 percent for the biggest decline in eight years.

Greek Prime Minister George Papandreou scheduled a referendum on the region’s bailout plan for his nation. The vote poses a threat to financial stability in the euro region and increases the risk of a “disorderly” default, Fitch Ratings said. The VIX pared its advance today after Dow Jones Newswires quoted a Socialist Party official as saying the referendum is “basically dead.”

“There’s no question it’s tough to gauge the reaction to these news events hitting the market, and the velocity of the moves is causing a lot of anxiety among traders,” Dan Deming, a VIX options trader at Stutland Volatility Group on the CBOE floor, said in an interview. “It just feeds on itself.”

To contact the reporters on this story: Cecile Vannucci in Amsterdam at cvannucci1@bloomberg.net; Jeff Kearns in New York at jkearns3@bloomberg.net

To contact the editors responsible for this story: Nick Baker at nbaker7@bloomberg.net; Andrew Rummer at arummer@bloomberg.net

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