U.S. and European options gauges surged after Morgan Stanley cut its forecast for global growth, concern grew that European banks lack sufficient capital and hopes for more stimulus from the Federal Reserve receded.
The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 35 percent to 42.67 at 4:15 p.m. in New York for the third-highest close of 2011. The VStoxx Index (V2X), which measures the cost of Euro Stoxx 50 Index options, snapped a five-day losing streak to gain 35 percent, the most since May 2010, to 47.17. Volatility gauges in Hong Kong, South Korea, Japan and India also rose.
Stocks plunged around the world, led by financial companies, after Lars Frisell, the chief economist at Sweden’s financial regulator, said it won’t take much for interbank lending to freeze. Also, the Wall Street Journal reported that U.S. regulators are scrutinizing the American operations of Europe’s largest lenders to assess their vulnerability. Morgan Stanley cut its forecast for global growth this year to 3.9 percent from 4.2 percent.
“We’re at a tipping point,” Barclays Ltd.’s Maneesh Deshpande, who leads the top-ranked equity-linked strategies team in Institutional Investor magazine’s 2010 survey, said in a telephone interview. “We could either have a repeat of 2010 where we rally back and everything is fine, or we could have a repeat of 2008 if European policymakers don’t provide some strong support of the market.”
VIX’s Surge
The VIX surged 50 percent to 48 on Aug. 8 for the biggest jump since February 2007, while the VStoxx climbed to its highest level since May 2010 on Aug. 10. The volatility benchmark for U.S. equities has averaged 20.37 in its 21-year history through yesterday. The VStoxx average has been 25.98 since April 1999, according to data compiled by Bloomberg.
VIX futures expiring next month rose 20 percent to 33.40. January futures increased 11 percent to 28.85.
“The fear is back in the market and people are willing to pay anything to protect their portfolios,” Brian Overby, an options analyst at TradeKing Inc. in Charlotte, North Carolina, said in a telephone interview. “We have major debt issues and the economy is really slowing down.”
The VIX never exceeded 50 before Lehman Brothers Holdings Inc. filed for bankruptcy in September 2009, which propelled the index to an intraday record of 89.53 the following month. Before that, it topped 40 after WorldCom Inc.’s 2002 bankruptcy, the Sept. 11 terrorist attacks, Long-Term Capital Management’s collapse in 1998 and the Asian financial crisis in 1997.
European Banks
European banks in the Stoxx Europe 600 Index fell 6.7 percent as a group, helping the European gauge sink 4.8 percent today, the most since March 2009. In the U.S., the Standard & Poor’s 500 Index tumbled 4.5 percent after reports reinforced concern that the world’s largest economy is slowing.
Options to sell Societe Generale (GLE) SA jumped to more than twice the four-week average and almost 10 times the number of calls to buy after shares of France’s second-largest bank slumped 12 percent to 21.60 euros, the lowest price since March 2009. On Aug. 10, they tumbled 15 percent, the most since October 2008. The lender’s implied volatility for at-the-money options expiring in 30 days surged to 94.80 from 67.13 yesterday.
Financial-Industry Puts
In the U.S., Bank of America Corp. (BAC)’s put trades rose to 2 times the four-week average and 1.7 times the number of calls, as shares of the nation’s biggest lender slid 6 percent to $7.01. The Charlotte, North Carolina-based bank’s 30-day implied volatility for at-the-money options jumped to 93.38 from 71.12 yesterday. The most-active contracts were November $4 puts.
Put volume for the Financial Select Sector SPDR Fund (XLF) also rose above its four-week average and was almost three times the number of call trades after investors bought 100,000 October $10 puts, according to a report by options strategists at Susquehanna Financial Group LLLP in Bala Cynwyd, Pennsylvania. The exchange-traded fund tracking 81 financial institutions dropped 4.8 percent to $12.38.
Calls on the iPath S&P 500 VIX Short-Term Futures exchange- traded note posted four of the 10 biggest gains among all U.S. options, according to data compiled by Bloomberg. August 41 calls jumped 7,900 percent to $1.60 each, while August 42 calls soared 5,900 percent to $1.20. Outstanding stock for the note plunged 48 percent last week, the biggest drop on record, as traders bet losses in the S&P 500 would slow.
Manufacturing, Home Sales
The volatility gauges rose after manufacturing in the Philadelphia region unexpectedly contracted in August by the most in more than two years as orders plunged and factories shed workers, according to a Federal Reserve report. Sales of U.S. previously owned homes dropped in July, while economists forecast an increase.
“You can see people getting out of the market, and there’s a lot of hedging going on,” Dan Deming, a VIX options trader at Stutland Equities LLC, said in a telephone interview from the CBOE floor in Chicago. “There’s continued concern about European banks and that we might be in for a credit squeeze.”
Morgan Stanley lowered its global growth projection for the year, citing an “insufficient” policy response to Europe’s debt crisis, weakened confidence and the prospect of fiscal tightening.
The CBOE Emerging Markets ETF Volatility Index jumped 27 percent to 45.19 as investors paid more for options on the iShares MSCI Emerging Markets exchange-traded fund, which tracks 852 companies in developing nations.
Hong Kong’s HSI Volatility Index rose 3 percent, while South Korea’s Kospi 200 Volatility Index advanced 7.8 percent, Japan’s Nikkei Volatility Index added 0.4 percent and India’s Nifty volatility gauge rose 7.7 percent.