The benchmark gauge for U.S. stock options fell, halting an eight-day streak of gains, after better-than-estimated jobs data fueled a rally in equities.
The Chicago Board Options Exchange Volatility Index (VIX), or VIX, fell 8.6 percent to 13.79 today for the biggest retreat since Oct. 16. The gauge, which measures the cost of using options as insurance against losses in the Standard & Poor’s 500 Index (SPX), surged 23 percent in the eight sessions before today. It hasn’t risen for nine consecutive days since records began in January 1990, data compiled by Bloomberg show.
Volatility surged in the past two weeks after record equity prices pushed valuations to a four-year high and improving economic data stoked concern the Federal Reserve may start reducing stimulus. Options traders today scaled back hedges against stock losses as equities rebounded from a five-day retreat, the longest slide since September.
“People are back to pricing in no big surprises until the beginning of 2014,” Bill Luby, who trades volatility products as chief investment officer of Tiburon, California-based Luby Asset Management LLC, said by phone. “There’s a pretty good case for volatility coming back then as we go through the uncertainty of what happens after a formal tapering announcement.”
The S&P 500 rose 1.1 percent to 1,805.09. The advance trimmed the index’s drop this week to less than 0.1 percent after it had retreated 1.2 percent over the past four sessions. The Dow Jones Industrial Average gained 198.69 points, or 1.3 percent, to 16,020.20.
U.S. employers added 203,000 jobs in November following a revised 200,000 advance in October, figures from Labor Department showed today. The median forecast of 89 economists surveyed by Bloomberg called for a 185,000 advance.
The Fed has said it will start paring stimulus if the economy improves in line with its forecasts. Policy makers, who next meet Dec. 17-18, will probably wait until their March 18-19 session before reducing monthly bond purchases to $70 billion from $85 billion, according to the median estimate in Bloomberg’s latest survey of economists conducted on Nov. 8.
“Tapering is going to happen very gradually and it will be phased out slowly,” Eric Augustyn, the Charlotte-based head of options strategy for Wells Fargo Private Bank. His firm manages $170 billion. “It most likely won’t be one of those events that will create excess volatility in the market.”
Before today, the VIX had posted the longest streak of advances since April 2012 amid concern that an early tapering of stimulus may hurt U.S. economic growth. Two Fed regional bank presidents said yesterday any decision to taper bond buying should be accompanied by a limit on the size of the program or a timetable for ending it.
The volatility gauge, which moves in the opposite direction as the S&P 500 about 80 percent of the time, has fallen 23 percent this year.
“The more we talk about tapering, the more volatility will increase,” Omar Aguilar, the San Francisco-based chief investment officer of equities at Charles Schwab Investment Management, said in a phone interview. The firm had $231 billion in assets under management as of Sept. 30. “Volatility in the market is linked to what may happen with the taper program. That’s what we’ll see over the next few months.”
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