‘Astonishing’ Stock Swings May Last 7 More Months, Futures Show

By Jeff Kearns

Dec. 2 (Bloomberg) -- U.S. stock swings will be more than triple the average in seven months as investors contend with a global recession and the worst returns since the 1930s, volatility futures show.

May contracts on the Chicago Board Options Exchange Volatility Index, or VIX, closed yesterday at 43.80, while futures expiring before then trade at higher levels, showing investors expect the Standard & Poor’s 500 Index to rise or fall at least 2.8 percent a day through June 17, according to data compiled by Bloomberg. The last time the benchmark index for U.S. stocks moved that much during the same amount of time was 1932.

“It’s astonishing,” said Jeremy Wien, a volatility trader at Societe Generale SA in New York. “It’s beyond even what were considered worst-case scenarios just last year.”

The recession in the U.S., which the National Bureau of Economic Research said yesterday began a year ago, and the 48 percent plunge by the S&P 500 since its October 2007 record drove up the price of options. Futures suggest the market will keep whipsawing investors, elevating the price of equity derivatives as insurance against declines.

The S&P 500 rose or fell 4 percent or more on 26 days since Sept. 15, as bank writedowns and losses from the U.S. mortgage market’s collapse approached $1 trillion worldwide. The last time the S&P 500 had as many 4 percent moves was 1933, when it happened 38 times, according to data compiled by Bloomberg. The index has increased or decreased 0.8 percent each day on average in its 80 years of history, Bloomberg data show.

Record High

The 18-year-old VIX, which never exceeded 50 before October, closed at a record 80.86 on Nov. 20 when the S&P 500 tumbled to the lowest level since 1997. The VIX fell four straight years through 2006 and slid to a 13-year low of 9.89 in January 2007, a month before surging a record 64 percent to 18.31 on Feb. 27, 2007, as U.S. equities suffered the worst rout in four years.

The VIX, calculated from prices paid for S&P 500 options, is known as Wall Street’s “fear gauge” because it measures the cost of using options as insurance against stock-market declines and almost always rises as shares fall. The VIX expresses the likelihood of an annual percentage change in the S&P 500 and probabilities for daily moves are calculated by adjusting for the length of the contract.

“Stocks are going to move around a lot,” said Chris Jacobson, chief options strategist at Susquehanna Financial Group in Bala Cynwyd, Pennsylvania. “We’ve found a new, significantly higher volatility level that’s expected to persist.”

The S&P 500 has advanced or declined 3.8 percent a day on average since Sept. 15, when New York-based securities firm Lehman Brothers Holdings Inc. filed for the biggest U.S. bankruptcy. The measure has never been that volatile over the same number of trading days.

The VIX averaged 30.98 this year and 56.14 since Sept. 15, compared with 15.60 in 2003 through the jump in February 2007. January VIX futures closed at 56.24 yesterday, while March contracts were at 47.88.

“We can foresee getting out of this economic situation but it’s not going to be easy getting there and that’s what the VIX futures are telling you,” said Michael McCarty, chief equity and options strategist at Meridian Equity Partners Inc. in New York. “It’s going to be rough sledding for awhile.”

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.