“The complacent atmosphere of the equity space is being challenged by the new order of slower growth as seen in the Chinese GDP and concerns that Fed financial engineering is unraveling on some levels,” Greg Richards, who trades VIX and S&P 500 options as an institutional options broker at Chicago- based PTR Inc. on the CBOE floor, wrote in e-mail on April 19.
The Federal Open Market Committee in March reaffirmed plans to buy bonds at the current $85 billion monthly pace until the labor market outlook improves “substantially.” It also pledged to keep interest rates near zero as long as unemployment is above 6.5% and inflation doesn’t exceed 2.5%. Unemployment was 7.6% last month.
The VVIX Index, a measure of VIX swings, jumped 16% last week to 95.52 for its biggest gain since end of 2012. The gauge reached its highest level since July on April 18. That day, the VIX rose as much as 10%, briefly erasing its 2013 loss.
There are more outstanding options betting on volatility gains than losses, with 4.14 million VIX calls versus 1.95 million puts as of April 17, data compiled by Bloomberg show. The ratio of calls-to-puts climbed to 3.08-to-1 on April 9, the highest level since February 2010.
Even after last week’s surge, the VIX is still 9% below its average for the past year, data compiled by Bloomberg show. Stock volatility will remain subdued until the Fed pares its stimulus policy, according to Steve Kilcullen of Nomura Holdings Inc. in New York.
“The trading is very defensive, but it has a short focus,” Kilcullen, head of flow derivatives sales for the Americas at Nomura, said in an April 19 phone interview. “Equity volatility won’t go higher until we see policy change or a reduction of policy effectiveness in the U.S.”
The U.S. job-creation engine sputtered in March as payrolls grew by 88,000, the smallest gain in nine months, Labor Department data showed April 5.