Bloomberg News

VIX Surges as Global Volatility Gains on Economic Growth Concern

September 22, 2011

Sept. 22 (Bloomberg) -- The benchmark index for U.S. stock options rose a fourth day, the longest streak of gains since July, as volatility gauges rose in Europe and Asia on concern the global economy is slipping into another recession.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 11 percent to 41.35 today, bringing its four-day increase to 33 percent. Europe’s VStoxx Index, which measures the cost of protecting against a decline in the Euro Stoxx 50 Index, rose 8.3 percent to 47.78. Hong Kong’s HSI Volatility Index climbed 19 percent, while South Korea’s volatility advanced 8.2 percent and India’s surged 22 percent, the most since Aug. 5.

Investors drove up prices for insurance against equity losses amid concern central banks are running out of tools to prevent another recession. The Federal Reserve said yesterday that there are “significant downside risks” in the U.S. economy, prompting the central bank to announce a $400 billion plan to spur growth as the recovery from the worst contraction since the Great Depression falters.

“It’s very difficult to find clarity here in market direction and volatility when trading seems to be led by fear, panic and computers as opposed to rational fundamentals,” said Jeremy Wien, a VIX options trader at Chicago-based Peak6 Investments LP, which manages more than $1 billion. “Market sentiment flips 180 degrees on a weekly basis.”

S&P 500

The Standard & Poor’s 500 Index has lost 7.1 percent since Sept. 16, and has slumped in six out of the past eight weeks. Today, the Stoxx Europe 600 Index plunged 4.6 percent and closed at its lowest level since July 2009.

The VIX surged 50 percent to 48, its highest level since March 2009, on Aug. 8. The gauge has an average of 20.44 in its 21-year history. The VStoxx reached its highest level since January 2009 on Sept. 12. The index’s average is 26.13 since April 1999, data compiled by Bloomberg show.

“The European Union is dealing with a problem they’ve never encountered before and that’s worrisome for investors,” Gareth Watson, vice president of investment management at Richardson GMP Ltd. in Toronto, said in a telephone interview. Richardson oversees about C$16 billion. “It’s unknown territory,” he said, and “there are no easy answers or quick answers to the European situation.”

Put options

Commodities plunged today amid speculation demand is slowing. Copper futures slumped 7.3 percent, while the S&P GSCI Index retreated 4.9 percent.

Put-options volume jumped to five times the four-week average for Freeport-McMoRan Copper & Gold Inc., whose bearish contracts were among the most traded in the U.S. equity options market. Copper sank to a one-year low, while oil and gold futures slipped on concern raw-material demand will falter amid an economic slowdown.

The price of puts to sell Freeport-McMoRan, the world’s largest publicly traded copper producer, should the company fall 10 percent was 1.21 higher than calls to buy on Aug. 30, the highest level since November 2005, Bloomberg data show. The price relationship known as skew fell 6.1 percent since then to 1.14 yesterday.

Molycorp Inc., owner of the largest rare-earth deposit outside of China, saw its 30-day implied volatility jump to 105.17, the highest level in a month, as the shares fell 9.8 percent to a 2011 low of $35.96. Put volume increased to more than 26,000 contracts, three times the four-week average.

“People are starting to become nervous about non-U.S. growth,” Michael Shaoul, chairman of Marketfield Asset Management in New York, said in a telephone interview. His firm oversees more than $1 billion. Copper “is sensitive to a risk of slowdown within the emerging market complex. That’s probably the biggest global risk out there, which people are unprepared for.”

--Editors: Joanna Ossinger, Nick Baker

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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