VIX Premium Shows Bear Market Lasting Two Years in U.S. as Traders `Panic'

[Purveyor]

Source: Bloomberg

By Jeff Kearns and Gareth Gore

March 2 (Bloomberg) -- Options investors are paying twice this decade’s average to protect against losses in U.S. stocks through 2011, signaling the bear market that already wiped out $10.4 trillion of equity value may last two more years.

“There’s a real panic in the markets, with some people wanting to buy long-term insurance at any price,” said Peter Sorrentino, who helps manage $16 billion, including $130 million in options at Huntington Asset Advisors Inc. in Cincinnati. “People have lost hope.”

Contracts to protect against a decline in the Standard & Poor’s 500 Index for two years cost $15,160 on the Chicago Board Options Exchange at the end of last week, compared with $6,875 in 2007, according to price-adjusted data compiled by Bloomberg. The current level shows traders expect the benchmark gauge for U.S. equities to fluctuate twice as much in the next two years as it has since 2000.

Federal Reserve Chairman Ben S. Bernanke said last week the economy is in a “severe contraction” that may continue to next year unless actions to save the financial system start working. The S&P 500 lost 53 percent since peaking in October 2007 while retreats in commodities and corporate bonds drove 920 hedge funds, or 9 percent of the total, out of business last year.

Little Chance of Relief

Options traders see little chance of relief, based on the so-called implied volatility of two-year contracts on the S&P 500. It jumped to a record 43.58 in November and stayed above 30 since then, a level it never previously exceeded, according to data compiled by Bloomberg and IVolatility.com, a New York-based provider of options data. Implied volatility is the main variable in determining an option’s price.

Read more: http://www.bloomberg.com/apps/news?pid=20601087&sid=acEymYZ6h7Mk&refer=home

[truthisfreedom]

1. Sigh. Welcome to the endless panic of 2009.

Enjoy your stay.

[theoldman]

2. The market will bottom whenever people start to get come confidence.

This year, next year, no one knows. One thing for sure is that gloom and doom thinking does not help.

[Oregone]

3. How confident can people be?

There is a massive mountain of debt against no assets, due to over-leveraged securities. Banks are absolutely insolvent. This isn't a consumer driven recession. A lack of confidence isn't the cause of the problem, but a symptom. The fundamentals of the economy are not strong, but devastatingly twisted, no matter how confident or scared the people are.

[Pale Blue Dot]

4. Thank you.

I'm so sick of people shooting the messenger.

[ret5hd]

6. Rainbows and Unicorns!!!!

Stop with the Negative Nancy stuff and just think of Rainbows and Unicorns! It'll all be O.K. I promise!

[rfranklin]

7. No, the market will bottom when people give up and...

throw in the towel. It will start to go up after that when the bottom feeders feel they are getting bargains.

[Dr.Phool]

5. I think AIG will sell them some insurance.

They put the "con" in confidence.

[On the Road]

8. The VIX Hitting the Roof

and traders panicking is the best possible signal for the markets.

Markets run by emotion in either direction usually overshoot. I really don't think the markets are undervalued yet, but with the cash on the sidelines, the huge short interest, and the VIX over 50, all the pieces are in place for a massive rebound.

Here's a long-term chart of the VIX compared to the NASDAQ. Look at where the peaks are: