VIX Bets Surge Amid Biggest Stock Swings Since October

Traders trying to protect themselves from the wildest fluctuations in U.S. stocks since October are turning to advanced weaponry: options on options.

More than 1 million contracts tied to moves in the Chicago Board Options Exchange Volatility Index have changed hands each day since Dec. 10, the most since mid-October, data compiled by Bloomberg show. Contracts on the VIX amount to bets on stock volatility that pay off when swings in shares are at their most violent.

Violent swings have been the rule lately, with the Dow Jones Industrial Average moving almost 300 points on Dec. 15 and 360 points the following day. The VIX is at the highest since Oct. 16 as a slide in crude prices and signs of a worldwide economic slowdown ripple through financial markets. Demand for VIX options shows investors are trying to get the most bang for their buck from equity hedges after entering the month with close to the fewest in two years.

“This move has caught a lot of people off guard,” Dan Deming, managing director at Equity Armor Investments, said by phone from Chicago on Dec. 12. “There were too many people on one side of the market and a lack of protection. Then you see this big scramble.”

About three-quarters of options changing hands each day on the CBOE volatility gauge represent wagers it will rise, data compiled by Bloomberg show. Those contracts are effectively bets against the Standard & Poor’s 500 Index, which moves in the opposite direction of the VIX about 80 percent of the time.

Catch Up

The VVIX Index, tracking contracts whose value is tied to whipsaws in the VIX, jumped to the highest since May 2010 last week. VIX options, or wagers on the volatility of volatility, are a step removed from the VIX itself, which tracks another set of options tied to the S&P 500. Traders are using VIX contracts to play catch up after being blindsided by losses in December, a month in which stocks have climbed for six straight years.

“We have been floating with no volatility on the wings of the Fed since 2008,” Michael McCarty, managing partner at New York-based Differential Research LLC, said by phone. “That game is over. VIX options are the fastest way to put on a leveraged, negatively correlated position to the S&P 500.”

Stocks in the U.S. have fallen 5 percent from a Dec. 5 record as West Texas Intermediate crude has dropped below $56 a barrel and debt concerns from Venezuela to Russia have raised speculation that global growth is at risk of being derailed. Those concerns come as the Federal Reserve is ending its stimulus measures and considering higher interest rates.

Ruble’s Plunge

Russia’s ruble touched a record low yesterday, extending a six-month, 50 percent tumble. A Bloomberg gauge tracking the top emerging-market currencies fell to the lowest since 2003 while equity benchmarks in Dubai and Saudi Arabia lost more than 7 percent each and Indonesian policy makers propped up the rupiah after it fell to a 16-year low.

Bank of England Governor Mark Carney said he sees the potential for contagion effect from emerging markets into developed ones that could have “some impact” on financial stability and growth.

“Some are speculating that there’s going to be a contagion effect with oil,” Eric Metz, a derivatives strategist and fund manager at Chicago-based RiverNorth Capital Management LLC, said by phone Dec. 12. “When there’s skittishness in the marketplace, the demand for protection on a near-term basis can reverse very rapidly.”

November Lull

The recent selling has been a reversal from the tranquility in November, when swings in the S&P 500 narrowed to the smallest in at least 10 years, according to 20-day Bloomberg data on historical volatility.

The lull in equities soothed speculators, who shed VIX options in a nod to an end-of-year rally in equities. Trading in the contracts was the slowest in two years, according to data compiled by Bloomberg. Options outstanding on the VIX have increased 45 percent since then.

The S&P 500 lost 0.9 percent to 1,972.74 on Dec. 16. The S&P 500 fluctuated an average of 40 points over the last two days in the biggest intraday swings since mid-October.

The VIX surged 15 percent to 23.57 after its biggest jump in four years last week. Futures on the volatility gauge expiring in December ended yesterday at 23.1, 2 percent below the VIX’s closing price, according to data compiled by Bloomberg. Contracts expiring in January closed at 20.1.

The VIX dropped 18 percent, the most since October 2013, to 19.44 at 4:15 p.m. in New York.

“It’s been so quiet for so long that people just got too short and now they’re racing to cover for year-end,” Dominic Salvino, a specialist on the CBOE floor for Group One Trading LP, the primary market maker for VIX options, said by phone Dec. 15.

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