Options Traders Boost Bets VIX Will Jump 74% as Stocks Retreat

(Bloomberg) -- Traders speculating stocks will fall boosted bets that the Chicago Board Options Exchange Volatility Index will jump 74 percent by Feb. 17, based on today’s most- active contract.

About 37,700 February 32.50 calls on the VIX changed hands, the highest in a week. The security, which has a strike price 74 percent above yesterday’s close, has been the most-traded among VIX contracts for the past two days. The benchmark gauge for U.S. stock options climbed 16 percent to 21.76 as of 2:03 p.m. in New York for the biggest intraday advance since Nov. 27.

Traders who purchase options that pay off when the VIX rises are usually speculating equities will retreat because the gauge moves in the opposite direction of the Standard & Poor’s 500 Index more than 80 percent of the time.

“With the market pulling back the last couple days there’s been an increase in call buying,” said Jeremy Wien, a VIX options trader at Societe Generale SA in New York. “People want to be sure they’re protected on the downside.”

The S&P 500 slid 1.7 percent to 1,118.77 following a White House proposal to reduce risk-taking at banks. The equity gauge is down 2.8 percent in the last two sessions, its largest slide since October, while the VIX rallied 21 percent. Before Jan. 20, the options measure had fallen 19 percent this year.

Open interest, or number of outstanding contracts, for the February 32.5 calls has more than tripled this month to 84,637. Those options have the fifth-largest open interest among all contracts linked to the VIX.

Calls Rally

The February 32.5 calls climbed 57 percent to 55 cents. Ninety-nine percent of the securities traded today changed hands on the ask price, which indicates that buyers initiated almost all of the transactions. The VIX, which has averaged 20.28 over its 19-year history, last closed above 32.5 on June 16.

The VIX gauges investor expectations for market swings over the next 30 days using a formula that incorporates the implied volatility, a key gauge of options prices, for S&P 500 puts and calls that are one or two months from expiration.

“A large customer is out there buying volatility,” said David Lutz, managing director of equity trading at Stifel Nicolaus & Co. in Baltimore. “There continues to be a lot of concern going on with sovereign debt, commercial real estate. There’s just a tremendous amount of headwinds out there.”