A favorite Wall Street measure of investor anxiety surged on Friday as U.S. stocks sank on concerns over the White House's plan to rein in risk-taking by banks indicating more stock market turmoil in weeks ahead.
The Chicago Board Options Exchange Volatility Index <.VIX>, popularly know as the VIX , ended up 22.63 percent at 27.31 and reached its highest level since early November. Over the last three sessions, the index rose 55.4 percent, its biggest three-day percentage gain since February 2007.
The VIX is just reflecting the troubles in the financial stocks and how it is going to affect all the market. That is why we are seeing such a big jump, said Herb Kurlan, Chief Executive of Vtrader Pro, an online proprietary trading firm in San Francisco.
U.S. stocks tumbled in their worst three-day slide in 10 months as President Barack Obama's sweeping restrictions on banks and the delayed confirmation of Fed Chairman Ben Bernanke put investors on the defensive. A drop in tech shares after Google Inc's disappointing results also weighed on sentiment.
Obama's remarks on Thursday triggered concerns among investors that banks may be constrained in their ability to generate trading profits.
Investors are nervous, notably due to the comments made by the White House this week on its banking proposals which may put new valuations on many of these stocks, said TD Ameritrade chief derivatives strategist Joe Kinahan.
Until we have a clear understanding of what form these proposals are going to take, investors will continue to be willing to pay more for options to insure their portfolios, Kinahan said. They may also be speculating that many financial
companies are overvalued.
The VIX is a 30-day risk forecast priced off of Standard & Poor's 500 index <.SPX> option prices. The index, which typically has an inverse relationship with the S&P benchmark, rose over the past three sessions as players bid up option premiums to manage stock market risk.
This week's upside breakout in the VIX broke its recent downtrend. The fact that the VIX hit a 17 level last week was probably an indication that the market was at a point where it was going to sell-off, Kurlan said.
There is a shift in sentiment to concerns of market risk from complacency at the start of the week, said Scott Fullman, director of investment strategy at WJB Capital Group.
VIX CALLS, SPX PUTS TURN ACTIVE
Many investors scrambled for index options as a likely hedge against a further setback in stocks.
Activity was brisk in VIX call options and S&P 500 put options, contracts often used to insure stock portfolios.
Overall volume in VIX options, which are priced off of VIX futures, surged to three times average daily turnover with 389,000 calls and 125,000 puts traded, according to option analytics firm Trade Alert.
In the S&P 500, about 691,000 puts changed hands, nearly double their average daily volume compared to 366,000 calls, Trade Alert data showed.
(Reporting by Doris Frankel; Editing by Andrew Hay)