The increasing swings in the US shares prompted the options traders in making unprecedented bets over equity volatility and so causing bearish and bullish contracts to reach sky-high amid the concern about Federal Reserve curtailing stimulus.
The options outstanding on iPath S&P500VIX Short-Term Futures ETN, that were tracking gauge of futures VIX, climbed to the highest 3.46M on 6th June. The Chicago Board Options Exchange Volatility Index, that is gauge of the derivative prices meant for Standard & Poor’s 500 Index, gained 51% since the 6-year low during March.
Contracts are used by investors on VIX note for hedging swings of stock-market while they are looking for the clues in the economic data as well as policy makers’ statements on whether purchases of Fed’s bonds will be reduced or maintained. S&P500 has fallen or risen more than 1% four times in the previous ten days, maximum in one month.
Stephen Solaka overseeing around $75M including the options as Belmont Capital Group’as co-founder in Los Angeles, talked about it saying that such spikes prior to big economic events tend to be becoming more common these days as all the eyes are over Fed.
VIX increased 7.6% to 17.50% on 5th June. Gauge dropped 9% after 2 days when stocks rallied over data of employment from Labour Department beat the estimates of economists.
The Outstanding Options
Amount of outstanding options at VIX ETN, security that is most traded tracking the volatility in US, rose 13% since expiration on 17th May. Daily volume of ETN averaged 48.2M during previous 30 days as compared to 15M one year back.
S&P tends to be down 2.6% from 21st May record over concern that Fed would consider to withdraw stimulus which has helped to lift index up by 140% since March of the year 2009. An economists’ survey last week showed that policy makers would trim the purchases of bonds to $65bn a month compared to the current $85bn at October 29th to 30th meeting of Federal Open Market Committee.
The volatility index of US increased 11% to 17.07% on Tuesday. Gauge still is below 16% its historical average of 23 years which was 20.32.
The Calls And Puts
Calls outstanding on volatility of Barclays Plc’s iPath jumped by 25% to 1.01M since 17th May expiration of options. During that period, interest that’s put open increased by 7.6% to 2.04M.
All the ten contracts most-owned on ETN happened to be puts.
The equity volatility might be subdued during upcoming months as the growth of steady earnings supports prices of stock, according to the head trader at Oakbrook Investments LLC, Giri Cherukuri. The profits for the companies in S&P would rise 6.6%this year as well as 11% next year, as according to estimates of analysts.
He also said that there is economic growth on one hand that needs picking up and Fed stimulus that needs slowing down.
Practice Of Short Selling
The investors encouraged the fact that volatility would decrease after entrance of bull market in 5th year with S&P 500 increasing in 2013 by 14%. Short selling increased to 18.7M shares on the 10th of June from 7.7M by 2012’s end.
The chairman of Fed said that during one response to the questions that followed on 22nd May, the congressional testimony that central bank can consider reducing monthly purchases of mortgage debt and Treasury within next couple of meetings if the officials see the sustained improvements’ signs in labor market. Fed president of Philadelphia called for having the stimulus tapered by the next meeting of central on 18th-19th June.
Scott Maidel in Seattle, with the Russell Investments, said that concerns of investors regarding Fed tapering tend to be quite high, more than any other time in 2013 and that use of options and futures in volatility hedging that is longer-dated, is really picking up.