VIX Drops, Hides Option Bets Markets Will Fall

“Too many people are thinking the worst is over, life gets better from here. We’re scratching our heads, going, ‘Something doesn’t feel right here.’ It’s probably better to have some insurance on the books.” -Peter Sorrentino, Huntington

FN: Complacency has set it... and that is never good. I last mentioned complacency and volatility in Where's the Volume and the Volatility?

Biggest VIX Drop Hides Options Bets S&P 500 Will Fall (Update1): "The biggest drop in U.S. options prices since 1998 masks growing anxiety over the stock market’s rebound, as traders pay more for bearish contracts than any time since before the failure of Lehman Brothers Holdings Inc.

Investors are spending the most since August 2008 to protect against a 10 percent decline in the Standard & Poor’s 500 Index versus wagers on an advance, according to data compiled by Bloomberg. That’s one month prior to New York-based Lehman’s bankruptcy. The premium on so-called put contracts increased even after the Chicago Board Options Exchange Volatility Index, a gauge of U.S. options prices known as the VIX, fell 40 percent last quarter.

Traders are locking in gains on the S&P 500, which rose as much as 40 percent since March, on concern the worst U.S. recession in a half century isn’t abating, according to Huntington Asset Management, BlackRock Inc. and Fiduciary Trust Co. The widening gap between bullish and bearish options belies the VIX’s retreat to below its level when Lehman collapsed and comes as U.S. companies prepare to report second-quarter earnings this week.

“Too many people are thinking the worst is over, life gets better from here,” said Peter Sorrentino, who helps manage $13.8 billion at Huntington Asset in Cincinnati. “We’re scratching our heads, going, ‘Something doesn’t feel right here.’ It’s probably better to have some insurance on the books.”