Debt ceiling worries spill into U.S. options market

Fri Oct 4, 2013 6:01pm EDT
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By Doris Frankel and Angela Moon

(Reuters) - With the U.S. government in Washington partially shut down, some options investors are starting to pay more for protection against market turmoil on worries that the current budget stalemate could lead to something more catastrophic - a default.

So far Wall Street has taken the back-and-forth in stride. The S&P 500 index is down 1.3 percent for the week, but still up 18 percent for the year, and numerous strategists have said the eventual resolution of Washington's legislate battles will provide a buying opportunity.

The effect of this so far has been to lift volatility indexes, but slowly, and from extremely low readings to levels still associated with relative calm in markets.

That's not to say all is quiet. The CBOE Volatility Index or VIX , widely known as Wall Street's fear gauge, has been moving up, and heavy trading in VIX options of late suggests some investors taking precautions. The so-called fear gauge this week topped the 18 level for the first time in three months.

"Certainly we have seen the bloom come off the rose for the broad market over the past few weeks as the government shutdown approached," said Brent Archer, options analyst at options research firm, in Charlottesville, Virginia.

The deadline for raising the debt ceiling is October 17, the last day that the Treasury Department estimates the federal government is certain to have enough money to pay all its bills.

During the debt ceiling crisis in 2011, resulting in the first-ever downgrade of the U.S. credit rating, the VIX surged as high as 48.

The VIX, a 30-day forecast of stock market volatility measured using a strip of near-term S&P 500 options, rose to 16.73 on Friday, from 13.12 on September 20, a sign of increased worry, though the current level is still considered low.   Continued...

Television news crews set up outside the U.S. Capitol in Washington, October 4, 2013. REUTERS/Jonathan Ernst