Europe Options Index Has Steepest Rise in 8 Months on Lehman

By Adam Haigh

Sept. 15 (Bloomberg) -- The benchmark index for European options rallied the most since January as investors bought insurance against equity declines after Lehman Brothers Holdings Inc. filed for bankruptcy.

The VStoxx, which measures the cost of using options as insurance against losses in the Dow Jones Euro Stoxx 50 Index, surged 26 percent to 34.14 at 1:21 p.m. in London, the biggest one-day jump since Jan. 21 and the highest since March.

``There has been a massive spike up,'' said Ben King, a trader at derivatives broker ETX Capital in London. ``The volatility is going through the roof.''

Lehman, once the fourth-largest U.S. investment bank, filed for bankruptcy after Barclays Plc and Bank of America Corp. abandoned talks to buy the crippled firm. Bank of America agreed to acquire Merrill Lynch & Co., the world's biggest brokerage firm, for about $50 billion.

Put options with a strike price of 200 pence expiring this month on Royal Bank of Scotland Group Plc, the most traded contract today among options on London's Liffe exchange monitored by Bloomberg, rallied 1,400 percent to 7.5 pence. Royal Bank shares slid 12 percent to 206.5 pence. The options contract is 3.1 percent away from the strike price.

``There is a lot of pain out there,'' said Ian Thurgood, an equities and derivatives broker at ODL Securities in London. ``With such a violent move it forces people to do something. Due to the expiry this week people are buying back near month puts and rolling them on to October, November and December,'' he added.

Allianz Puts

Puts on Allianz SE, Europe's largest insurer, for expiry in December with a strike price of 92 euros surged 110 percent to 3.93 euros, the most active of options contracts on the Eurex exchange, according to Bloomberg data.

Calls for Deutsche Bank AG with a strike price of 58 euros that expire this month slumped 81 percent to 28 cents, as the stock of Germany's biggest bank lost 9.4 percent to 52.49 euros in Frankfurt.

More than two puts were traded for each call that exchanged hands on the VStoxx.

European-style calls give the right to buy a security for a certain amount, the strike price, on a given date. Puts convey the right to sell. Investors use options to guard against fluctuations in the price of securities they already own, make leveraged bets on shares or wager that volatility, or stock-price swings, will increase or decrease.

In France, puts of Axa SA expiring this month with a strike price of 20.5 euros soared 685 percent, the steepest gain today among all the options contracts on the index, Bloomberg data show.

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To contact the reporter on this story: Adam Haigh in London at ahaigh1@bloomberg.net.