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VIX 21% Tumble Means Shorts on Volatility Double Money: Options
2013-10-17 08:14:24.125 GMT
(For an Options column news alert: SALT OMA.)
By Nikolaj Gammeltoft and Alex Barinka
Oct. 17 (Bloomberg) -- The biggest single-day decline in
U.S. equity volatility since 2011 enriched options traders who
spent the month doubling down on bets the bull market in stocks
would survive the default deadline.
The most-owned contract on the Chicago Board Options
Exchange Volatility Index, November 14 puts, soared 129 percent
yesterday, while wagers the VIX will drop to 12 over the next
month rose fivefold, data compiled by Bloomberg show. An
exchange-traded note that allows investors to speculate on
smaller price swings jumped 12 percent after investors created
7.7 million new shares in the security this month.
Stocks surged, pushing the Standard & Poor’s 500 Index
within 4 points of a record, and the VIX lost 21 percent as
lawmakers agreed on raising the debt limit, generating profits
for traders who had doubled bets on lower volatility. Investors
are turning to VIX options and funds to speculate on market
fluctuations and offset losses when stocks drop, making an ETN
based on the gauge the third-most traded U.S. security.
“For those with the instinct to buy at the darkest hour
before the dawn, the payout profile in VIX index puts is more
than two to one,” Neil Azous, founder of Rareview Macro LLC, a
Stamford, Connecticut-based advisory and research firm, said in
an interview yesterday.
Fiscal Standoff
Congress voted yesterday to end the 16-day government
shutdown and raise the U.S. debt limit, ending the nation’s
fiscal impasse. The vote concludes a four-week funding standoff
that began with Republicans demanding defunding of Obama’s 2010
health-care law and objecting to raising the debt limit and
funding the government without attaching policy conditions.
The S&P 500 rose 1.4 percent to 1,721.54. The index slumped
to a one-month low on Oct. 8 as the debate in Congress reached a
stalemate, before recovering in a 4 percent rally. The VIX,
which moves in the opposite direction of the benchmark equity
gauge 80 percent of the time, lost 3.95 points to 14.71, for the
biggest percentage decline in more than two years.
Traders bought about 150,000 November 14 VIX puts over the
past two weeks, said Mark Caffray, who brokers contracts on the
index for clients at Chicago-based PTR Inc. The price of the
option, the sixth-most traded on U.S. exchanges, has jumped to
55 cents from 20 cents on Oct. 8.
Deal Profits
“It was a way to say: ‘A deal is going to be done, and if
so I’m going to profit from it,’” Stephen Solaka, who helps
oversee about $100 million as managing partner of Belmont
Capital Group in Los Angeles, said in a phone interview. “Smart
money took advantage of some of the fear. It worked out fairly
well.”
Contracts betting on a decline in the volatility gauge with
a strike price of 12 climbed to 5 cents from 1 cent, the biggest
percentage gain among VIX options. They expire on Nov. 20.
The VelocityShares Daily Inverse VIX Short-Term ETN, which
produces the inverse return of VIX futures, gained 12 percent to
$27.39. The shares outstanding have jumped 70 percent to 18.8
million since the government shutdown began on Oct. 1, the
highest level since July.
The ETN is the second-most U.S. traded security that
profits from stock swings and has the 13th highest trading
volume among more than 1,500 exchange-traded products, according
to data from the past 30 days compiled by Bloomberg.
Bearish Options
Bearish VIX options with a strike level of 15 expiring in a
month had the largest increase in open interest since the
government shutdown began on Oct. 1. The contracts surged 88
percent to $1.05.
Stocks swings will widen as lawmakers prepare to clash
early next year, according to Scott Wren of St. Louis, Missouri-
based Wells Fargo Advisors LLC. The framework negotiated by the
Senate would fund the American government through Jan. 15, 2014,
and suspend the debt limit until Feb. 7, setting up another
round of confrontations.
“We are going to go through the same thing again who knows
how many times over the next few months,” Wren, a senior equity
strategist at subsidiary of Wells Fargo Co., which oversees
about $1.3 trillion, said by phone. “There are questions over
Chinese growth, the issues over in Europe, the debt and deficit
issue in the States is going to come around again.”
Declining VIX
Traders have increased bets that the VIX will decline,
sending the ratio of puts outstanding versus calls to a three-
month high. The total number of puts to sell the index rose 114
percent to 2.88 million over the past month through yesterday’s
expiration, the biggest jump since August 2011, according to
open interest data compiled by Bloomberg. That compares with a
55 percent gain in the ownership of calls to 5.7 million.
During the week ending Oct. 14, the open interest for VIX
puts rose by 625,000 contracts, compared with an increase of
495,000 in the number of calls outstanding.
The CBOE Skew Index, which tracks the price to protect
against a drop in the S&P 500, climbed 15 percent from its
September low through Oct. 15, data compiled by Bloomberg show.
It reached 131.01 this week, the highest since March 2012.
“All the recent put buying in the VIX, which is paying off
big time, is evidence that customers had it right on a
speculative play in the VIX versus the usual call buying as a
hedge,” PTR’s Caffray said.
In Asia, Japan’s Nikkei Volatility Index dropped 11 percent
to 21.61 today, the lowest level since January, as South Korea’s
Kospi 200 Volatility Index retreated 4.1 percent to 14.01 and
Hong Kong’s HSI Volatility Index declined 4.4 percent to 16.93.
Europe’s VStoxx Index slid 3.1 percent to 18.01 at 10:11 a.m. in
Frankfurt today.
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--With assistance from Cecile Vannucci in New York. Editors:
Lynn Thomasson, Jeremy Herron
To contact the reporters on this story:
Nikolaj Gammeltoft in New York at +1-212-617-1061 or
ngammeltoft@bloomberg.net;
Alex Barinka in New York at +1-212-617-8664 or
abarinka2@bloomberg.net
To contact the editor responsible for this story:
Lynn Thomasson at +1-212-617-0506 or
lthomasson@bloomberg.net