VIX Options Show Biggest Bets on Stocks Retreat Since June 2008

[Joanne98]

Jan. 25 (Bloomberg) -- Traders are piling into bets that the biggest sell-off in U.S. shares since March will increase stock market volatility, pushing call options on the VIX Index to the highest level in 19 months.

Outstanding contracts speculating on an advance in the Chicago Board Options Exchange Volatility Index climbed to three times the number of wagers for a drop, the highest ratio since June 2008, data compiled by Bloomberg show. The VIX, which measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, moves opposite to equities more than 80 percent of the time.

Investors are doubling down after some of last week’s most- traded options rose 75 percent on Jan. 22. They’re speculating President Barack Obama’s proposals to limit risk-taking by banks and signs China will rein in growth will extend the S&P 500’s drop after it fell 5.1 percent in the last three days.

“There is higher probability that we will see moves to the downside,” said Tim Freeman, head of U.S. equity derivatives sales at Capstone Global Markets LLC in New York. “The changes that are being proposed to the banking industry, the political motivations and the policies that are being considered are game changers and they will move this market in a big way.”

The VIX jumped 55 percent to 27.31 in the last three sessions, the biggest surge since February 2007, as demand rose for options to protect equities from losses. Futures show traders are betting it will remain above 25 for six months after averaging 20.29 over its two-decade history.

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http://www.bloomberg.com/apps/news?pid=20603037&sid=afYZyM_3ZVaw