VIX Falls to Lowest Level Since Lehman’s Bankruptcy

By Jeff Kearns and Gareth Gore

May 20 (Bloomberg) -- U.S. and European options are trading at their lowest levels since Lehman Brothers Holdings Inc.’s September collapse after benchmark indexes rallied more than 33 percent over the last 10 weeks.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, and Europe’s VStoxx Index have both retreated to their lowest levels since Sept. 12, the last trading day before Lehman filed the biggest bankruptcy in U.S. history.

“Volatility fell off a cliff,” said Carl Mason, head of U.S. equity derivatives strategy at BNP Paribas in New York. “I don’t get the sense that many investors are putting on new hedges, but if they are they’re not hedging against a complete meltdown.”

The VIX’s 13 percent decline so far this week dwarfs the 3.8 percent drop in the VStoxx through yesterday. The VStoxx hasn’t fallen below the U.S. gauge in more than three weeks.

Traders are paying less for U.S. options after government stress tests of banks reassured investors and better-than- forecast corporate earnings propelled the Standard & Poor’s 500 Index to a 34 percent rally from its 12-year low on March 9. The VIX has slipped 42 percent in the same period and bank stocks almost doubled.

‘More Clarity’

“There’s more comfort, there’s more clarity, there’s less fear, there’s less panic,” said Neil Davies, a volatility trader and head of structured equity products at SunTrust Robinson Humphrey Capital Markets in Atlanta. “Options are getting cheaper because people don’t feel like they need as much protection as they did in February.”

The VIX dropped 4.8 percent to 28.80 yesterday, while the VStoxx slumped 1.2 percent to 31.54 at 1:01 p.m. today in London. Both remain above their average levels of 19.9 and 25.6, respectively, according to data compiled by Bloomberg.

Stocks haven’t recovered all the ground lost since Lehman’s bankruptcy. The S&P 500, which closed yesterday at 908.13, must rally 38 percent to reach its level from before the bank’s collapse.

The VIX is calculated from S&P 500 options no more than 30 days from expiration. The VStoxx gauges the cost of contracts on the region’s Dow Jones Euro Stoxx 50 Index. Options are derivatives that give the right though not the obligation to buy or sell a security at a set price and date.

Price Swings Narrow

“The ongoing drop in the VStoxx comes down to a combination of lower levels of general risk aversion as markets move higher and sentiment improves, and lower levels of daily jumps in share prices during the last month,” said Pete Clarke, an options strategist at Citigroup Inc. in London.

Options prices also are decreasing because stock-market swings are narrowing. The S&P 500 traded in a 1.23 percent range between yesterday’s intraday high and low, the second-narrowest span in 2009. This year’s 2.91 percent average daily swing is down from 5.1 percent in the fourth quarter of 2008.

The VIX has tumbled 64 percent since jumping to 80.86, the highest in its 19-year history, on Nov. 20. The gauge reached an intraday record of 89.53 on Oct. 24.

“If you look at what shot it to 90, it was the fear of the entire banking system imploding, not recession,” said Peter Boockvar, the equity strategist at Miller Tabak & Co. in New York. “Now it’s the hopes and wishes that we’ve seen the worst and that less-bad turns to good sooner rather than later.”

Bank Stress Tests

U.S. regulators released stress test results May 7 for 19 lenders and ordered 10 institutions to raise a total of $74.6 billion in capital to withstand a deeper recession. Banks and brokerages in the S&P 500 have soared 93 percent since the benchmark’s March low, the best gain of 10 industry groups, according to data compiled by Bloomberg.

Two-thirds of the 450 companies in the S&P 500 that have released first-quarter results beat analysts’ projections, the data show.

June VIX futures slid 1.5 percent to 30.40 yesterday, while July’s contracts lost 0.3 percent to 30.90. August and September futures gained 0.2 percent.

Europe’s VStoxx dropped 32 percent through yesterday since the 12-year low for European stocks on March 9. The Euro Stoxx 50, a gauge of the largest companies in the euro region, rose 36 percent over the same period on growing optimism that Europe’s worst recession since the World War II is easing.

The VStoxx decreased 64 percent since closing at a record 87.51 on Oct. 16. The U.K.’s FTSE100 Volatility Index, Germany’s VDAX-New, and France’s CAC 40 Volatility Index have all slipped more than 61 percent from their October records.

“The recent downward trend for volatility has proved to be robust,” Societe Generale analysts, led by Paris-based Vincent Cassot, wrote in a May 19 note to clients. The report cited the decline in European option prices last week even as the Euro Stoxx 50 posted its worst weekly drop since March. The VStoxx retreated 8 percent last week.

To contact the reporters on this story: Jeff Kearns in New York at jkearns3@bloomberg.net; Gareth Gore in Madrid ggore1@bloomberg.net.