Reuters: Financial Services and Real Estate: REFILE-Options risk gauge at 5-month high; volatility looms

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REFILE-Options risk gauge at 5-month high; volatility looms Jun 1st 2012, 20:50 Fri Jun 1, 2012 4:50pm EDT * Traders brace for more volatility * Dow turns negative for the year * Uncertainty in Europe, US drive put-buying in Spyders, SPX By Doris Frankel and Angela Moon June 1 (Reuters) - Many cautious investors took a defensive stance on Friday, snapping up protection against more declines on Wall Street on growing concerns over the health of the global economy. Projected volatility on the Standard & Poor's 500 Index, as measured by the CBOE Volatility Index or VIX, jumped nearly 11 percent to 26.66 on Friday, a five-month high. VIX futures are also higher, indicating additional volatility in the months ahead. May's U.S. Labor Department payrolls report was the weakest for job growth in months and policymakers in Europe continued to search of a solution to the euro zone's crushing debt problems. "The market is definitely concerned about both Europe and the economic situation in the United States," said Herb Kurlan, Chief Executive of brokerage firm VT Brokers in San Francisco. The Dow Jones industrial average gave up all of its gains for the year while the S&P 500 fell below the 1,300 level for the first time in 2012. Volatility has been rising in tandem with the market downtrend as negative news from around the world has weighed on U.S. stocks. "There has definitely been demand for puts in the indexes and in many of the Internet and social network stocks," Kurlan said. "Put buying has been steady and has been building up in the last week or so." Options trading has been active, favoring put options, in the SPDR S&P 500 Trust, an ETF more popularly known as the Spyders, and in the S&P 500 index, according to Trade Alert. Trading in the VIX options pit has been brisk with calls outpacing puts on expectations of another short-term spike in market volatility, said Joe Cusick, senior market analyst at brokerage firm OptionsXpress. But some say the oversold market conditions have again reached extremes, setting a stage for a short-term rally. "This is quite similar to exactly two weeks ago on Friday, May 18, when oversold conditions spurred the halting rally that we saw over the following week and a half," said Larry McMillan, president of options research firm McMillan Analysis Corp in a report. The S&P 500 index is now below the 1,290 level, once viewed as key support. "We'll need to see the market closing above that level to continue to believe it will hold as support," he said. "SPX 1250 is the next major level of support below". Despite the jump in VIX, the current volatility reading is a far cry from the 2011 high of 48 and a peak of 89.53 after the collapse of Lehman Brothers in 2008. Link this Share this Digg this Email Reprints

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