Goldman Sachs Sees No Panic in Options as VIX Takes Six Weeks to Exceed 20


It took six weeks of equity losses, a series of lower-than-estimated economic reports and political turmoil in Greece to finally drive the options gauge known as the VIX above its long-term average. The Chicago Board Options Exchange Volatility Index rose 17 percent to 21.32 yesterday, topping its 21-year mean of 20.34 for the first time since March 21, according to data compiled by Bloomberg. The VIX averaged 17.44 since the Standard & Poor’s 500 Index, the benchmark measure of U.S. stocks, began falling after reaching an almost three-year high on April 29. The options measure failed to surge even after the Citigroup Economic Surprise Index sank to minus 117.20 this month, meaning data missed projections in Bloomberg surveys by the most since January 2009. The response shows there’s no panic among investors buying and selling equity derivatives after the S&P 500 fell 7.2 percent in the past month and a half, according to traders and strategists at Goldman Sachs Group Inc. (GS), BNP Paribas SA and Sterne Agee & Leach Inc.

“The move down was gradual, and there was no panic,” said Alex Panagiotidis, managing director for equity derivatives at Sterne Agee in New York. “When the move is gradual, there’s no panic, so the VIX doesn’t go up as much.”

Vote on Papandreou

U.S. stocks sank the most in two weeks yesterday, almost erasing the S&P 500’s 2011 gain, and the euro slid the most in more than a month amid rising concern that Greece will default and evidence that the American economy is slowing. Greek Prime Minister George Papandreou said he will reshuffle his Cabinet and seek a confidence vote today, battling to control a shrinking majority and push through austerity measures demanded by international lenders. The CBOE index has risen 45 percent since the S&P 500’s peak at the end of April. The slump should have lifted the VIX to 23, according to strategists at Goldman Sachs. S&P 500 skew, which measures how much investors are paying for puts to sell in relation to calls to buy, has fallen to an almost three-month low. Stability in the VIX signals that the S&P 500’s six-week slide, the longest in three years, isn’t convincing investors that stocks are headed for a bear market. The index lost an average of 6.5 percent in the past year’s four biggest slumps, which averaged 17 calendar days in length, then rebounded by an average of 12 percent through the next peak.

‘Pretty Comfortable’

“There wasn’t a panic trade because funds had already lowered their exposure,” said Layla Peruzzi, vice president for equity derivatives at Jefferies Group Inc. in New York. “When the market went lower, we had people selling options they already owned. They weren’t scrambling for protection. They were being very calm about it. Investors are pretty comfortable.” Since April 29, the VIX has posted a 6.5 percent median increase on days when the S&P 500 fell by 1 percent or more, according to data compiled by Bloomberg. That’s less than the 9.1 percent increase this year before the peak, the data show. The VIX, which tracks S&P 500 options with a 30-day maturity, typically moves up about 1.2 points for every 1 percent decline in the S&P 500, Krag “Buzz” Gregory, a New York-based derivatives strategist at Goldman Sachs, wrote in a report sent to clients on June 14. That relationship implies that the VIX should be at 23, he said.

Japan’s Earthquake

The volatility gauge is down 27 percent since this year’s peak of 29.40 on March 16, when it surged to an eight-month high after Japan’s earthquake and nuclear disaster. “You’re still not seeing a lot of demand for downside S&P puts,” said Dan Deming, a VIX options trader at Stutland Equities LLC on the CBOE floor. “It’s almost like the market’s in denial and it’s very strange and causing a little bit of apprehension. There’s a lot of confusion and people aren’t sure how they want to position themselves.” The VIX remains below its 2011 peak even after data on jobs and manufacturing reinforced concern that the global economy is slowing. Yesterday, the Federal Reserve Bank of New York’s manufacturing index dropped to minus 7.8, the lowest level since November, while U.S. industrial production increased 0.1 percent, missing the 0.2 percent median growth estimate in a Bloomberg survey of economists. Investors so far this year appear comfortable with the VIX in the range of 16 to the low 20s, said Bouhari Arouna, an equity derivatives strategist at BNP Paribas (BNP) SA in New York. When the index falls to the lower end of that range, traders often buy calls to bet on a rebound, and when it rises into the 20s they usually buy puts to profit from a retreat, he said.

‘Sign of Complacency’

“We don’t see any put buying, and instead we’ve been seeing people buying calls, even at current levels,” he said. “That’s not good for stocks. It can be more neutral. If you look at the actual options hedging activity in the indexes, there’s not much going on. We believe that’s a sign of complacency, although it can also mean that investors have enough hedges on.” U.S. stocks have retreated for six straight weeks, giving the Dow Jones Industrial Average its longest slump since 2002. July VIX futures, which expire in a month, rose 9.1 percent to 20.95 yesterday, while August’s increased 6.5 percent to 21.25. “The market isn’t completely buying into a prolonged decline,” said Max Breier, equity derivatives strategist at BMO Capital Markets Corp. in New York. “It’s been a very orderly selloff and people haven’t really felt any panic,” said Dominic Salvino, a specialist at Chicago-based Group One Trading, the primary market maker for VIX options. “The overall news is just more of the same: Weak job creation, intractable housing problems, uncertain regulatory environment, etc. — nothing that represents a shock to the system.”


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