Gauges of stock volatility surged around the world as the weekend meltdown in Greece collided with China’s market unraveling and traders bought hedges to stanch the bleeding.
The Chicago Board Options Exchange Volatility Index surged 35 percent, its biggest increase in two years, while a gauge of European share swings climbed 15 percent to an eight-month high. The surge shook U.S. traders out of a six-month-long slumber in which daily changes in the S&P 500 failed to exceed 2 percent for the longest stretch since 2007.
“Imagine you look out your window and four people’s houses are on fire and your house is not, and you can pick up the phone and call your insurance agent and get fire insurance,” said Mark Sebastian, options trader and founder of Option Pit, a Chicago-based education and consulting firm. “That’s essentially what we’re seeing right now.”
Gains in volatility reflect wider price swings as well as demand among traders for hedges in the options market.
The VIX jumped almost 5 points to 18.85, the highest since February, while Europe’s VStoxx Index posted its biggest gain since April, data compiled by Bloomberg show. A measure of China turbulence hit the highest in seven years as the Shanghai Composite Index slumped 3.3 percent into a bear market.
Volatility was whipped up as European stock indexes fell between 2 and 4 percent and the S&P 500 dropped to a three-month low, erasing all 2015 gains. Greece closed its banks and imposed capital controls after Prime Minister Alexis Tsipras on Friday called for a July 5 referendum on austerity measures demanded by creditors.
Traders are betting the calm that has ruled American equities for the better part of three years is in danger. The S&P 500 has had zero declines of 10 percent or more since 2011, part of a six-year bull market in which prices tripled.
“The U.S. has woken up a little bit to the risk from Greece,” Nick Kalivas, a senior equity product strategist at Invesco Powershares in Chicago, said by phone. “Europe has been seeing volatility lift with the VStoxx climbing since March, while the U.S. has been much more sleepy and more complacent.”
The VIX has hovered at an average level of 13.7 during the second quarter, extending a four-year decline that began during the last Greek debt crisis. Today’s close is roughly the equivalent of the average level of volatility in 2012, a year the S&P 500 rose 13 percent.
“The smart money still thinks that something is going to get resolved, but it seems a lot less sure of itself, I can tell you that much,” said Sebastian.
Bailout negotiations between Greece and its creditors broke down and the country announced a countrywide referendum on proposed aid. Greece’s equity market was shut, though a U.S.- listed exchange traded fund tracking its shares lost 20 percent.
While equity options registered rising trepidation, stress measures in credit markets showed the threat of contagion is limited. The difference between the rate on a two-year interest-rate swap and Treasury yields, the swap spread, rose to 24.56 basis points Monday. It was higher on June 22.
In China, the central bank’s effort to boost confidence with an interest-rate cut was overshadowed by investors sprinting for the wings. The retreat marked the end to the nation’s longest-ever bull market, a rally that’s lured record numbers of individual investors.
The Shanghai Composite’s 10-day volatility reading jumped to 60 on Friday, the highest since November 2008, while its 3.8 percent average intraday move this month is more than four times bigger than that of the S&P 500.