VIX extends longest gain since 2012 on Fed, budget concerns

December 4, 2013 04:54 PM
More volatility expected

The benchmark gauge for U.S. stock options rose for a seventh straight day in the longest streak since April 2012 on concern over the timing of Federal Reserve stimulus cuts and the outcome of budget negotiations.

The Chicago Board Options Exchange Volatility Index, or VIX, gained 1 percent to 14.70 today and has risen 20 percent since Nov. 22 to reach a seven-week high. The index measures the cost of using options as insurance against losses in the Standard & Poor’s 500 Index, which has fallen 0.8 percent since a record high last week.

“You’re seeing volatility return to the marketplace,” Dominic Salvino, a specialist on the CBOE floor for Group One Trading, the primary market maker for VIX options, said in a phone interview. “The VIX had gotten awfully low and as the rally in stocks started to lose steam then people got a little worried and started to push prices up on S&P 500 options.”

Central-bank policy makers have been scrutinizing data to determine whether the economy is robust enough to withstand a reduction in their support. They cited during their last meeting lower government spending and budget standoffs as being among “several significant risks” that remained.

The VIX, which moves in the opposite direction of the S&P 500 about 80 percent of the time, reached 12.19 in November, 40 percent below the average reading of 20.21 since 1990 and close to its lowest level since 2007. While the gauge has lost 18 percent in 2013, the S&P 500 has surged 26 percent, poised for the best annual gain since 2003, as the Fed has refrained from reducing its monthly bond purchases.

‘More Volatility’

The S&P 500 briefly erased an early loss today as optimism grew that U.S. budget negotiators are near a deal that could avoid another government shutdown next year. Congress on Oct. 16 passed legislation funding the government through Jan. 15 as part of the agreement to end a partial shutdown, the first in 17 years.

“Expect a bit more volatility in the early part of the month with a bigger macro calendar, but keep in mind that December is known for its seasonal strength and that the performance-chasing tends to be stronger during the very good years,” Michael Purves, head of derivatives research at Weeden & Co., wrote in a note to clients yesterday.

December has been the second-best month for U.S. equity returns, according to data compiled by Bloomberg that starts in 1928. The average return for the month is 1.5 percent, more than twice the overall monthly mean of 0.6 percent.

About the Author