VIX falls before earnings reports

July 9 (Bloomberg) -- The biggest June rally in U.S. stocks since 1999 has pushed options prices to the lowest level before any earnings season in almost four years even as analysts predict profits will fall.

The Chicago Board Options Exchange Volatility Index, which tracks the cost of contracts on the Standard & Poor’s 500 Index, has lost 36 percent since its 2012 peak last month. It slipped 6.8 percent below the S&P 500’s 20-day historical volatility, a measure of actual swings, on July 6, data compiled by Bloomberg show. That’s the cheapest contracts have been one trading day before Alcoa Inc. reports profit since October 2008.

Optimism that an agreement among European leaders on banks will help contain the region’s debt crisis and a 6 percent rally in the S&P 500 since June 1 has helped lower options prices, according to Scott Maidel of Russell Investments. The VIX has increased a median of 7.9 percent during the first month of second-quarter reporting periods dating back to 2002, according to data compiled by Bloomberg.

“We are just starting to see investors re-initiate hedges before earnings and as European concerns reemerge,” Maidel, who helps oversee $141 billion as a money manager for equity derivatives at Russell Investments in Seattle, said in a July 6 interview. “The low absolute level of VIX and a good price entry point for the S&P 500 make for a reasonable combination to seek downside protection.”

VIX, VStoxx

The VIX snapped a four-week streak of losses last week, rising 0.1 percent, after government data showed slower-than- forecast growth in U.S. payrolls and European Central Bank President Mario Draghi said the region’s economy remains weak. The volatility gauge was up 5.7 percent to 18.07 at 9:41 a.m. in New York today. Europe’s VStoxx Index, a measure of Euro Stoxx 50 Index option prices, climbed 2.5 percent last week and added 1.3 percent to 25.92 today.

Alcoa begins the U.S. earnings season today with second-quarter results from the largest U.S. aluminum producer scheduled to be released after the close of regular trading. Analyst estimates compiled by Bloomberg project a 1.8 percent decline in profits for S&P 500 companies in the April-June period, which would mark the first year-over-year decrease since 2009, even as revenue increased 2.5 percent.

Option traders are increasing wagers that volatility will rise. The ratio of calls to buy the IPath S&P 500 VIX Short-Term Futures ETN relative to puts to sell rose to 0.79-to-1 on July 5, near its highest level since January, according to data compiled by Bloomberg. Ownership of calls to buy the U.S. exchange-traded note that tracks VIX futures rose 59 percent to 889,222 since the June 15 options expiration. During that time, open interest for puts added 30 percent to 1.13 million.

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