NEW YORK (Reuters) - In the last month, the U.S. stock market is down just 0.8 percent, but it’s been a bumpy ride: Since Dec. 9, the S&P 500 has had a 4 percent selloff, a 6 percent rally, and a 4 percent drop that ended Thursday with a two-day gain of 3 percent. Equities were hit hard again Friday - down almost 1 percent.
Investors made queasy by the sharp selloffs and snapback rallies might want to prepare themselves for more of the same. A growing number of market watchers say the low-volatility regime that dominated in 2013 and 2014 has ended, and the roller-coaster ride going on now has become the norm.
“This year has the potential to be a very good year for stocks but we will see more and bigger spikes in volatility,” said Brian Reynolds, chief market strategist at Rosenblatt Securities in New York.
Uncertainty about impending Greek elections, rising credit spreads, the possibility of a Russian default, and how far oil prices could fall is boosting the CBOE Volatility Index .VIX, the market’s favored indicator of Wall Street’s anxiety. For example, stock investors have attempted to buy up energy shares cheap, only to be hit hard when oil keeps falling, Reynolds said. The VIX is a measure of how high investors perceive the risk or uncertainty about the size of changes in a security’s value.
Investors have responded to this uncertainty by loading up on protection through the use of options on the S&P and the VIX. Recent increases in average daily volume in exchange-traded funds designed to take advantage of higher volatility - or hedge against it - also shows investors are trying to grapple with an up-and-down environment.
From the beginning of 2013, on average, the S&P 500’s average daily trading range was 15 points; in the last three weeks that has jumped up to a daily average of 25 points.
A rapid expansion in open interest in SPX options shows many investors are hedging long stock positions as well as speculating on further drops in the index in the near-term, said Ophir Gottlieb, chief executive of Los Angeles-based Capital Market Laboratories.
Traders are buying VIX calls in the February and March expiration at the 25 level, said J.J. Kinahan, chief market strategist at retail brokerage TD Ameritrade Holding Corp. The VIX was last trading at 17.82, so that implies a sharp increase.
“We are starting to see people buying volatility as almost a type of asset class,” Kinahan said.
That can be seen in the trading of leveraged ETFs, which seek to double the gains or losses in the VIX on a given day. Over the last 20 days, the ProShares Ultra VIX Short-Term Futures VIX ETF (UVXY.K), which looks to double the daily move in the VIX, has seen daily volume of 16.7 million shares, compared with an average of 9.66 million in the past 200 days.
A similar ETF, the ProShares Short VIX Short-Term Futures ETF (SVXY.K) has seen daily volume more than double, to 2.86 million shares a day in the last 20 days, compared with 1.36 million in the last 200 days.
Those protecting against losses are also paying more money for this. Across major equity indices, the skew - an indicator of how desirous investors are of protection - is extremely high, said Mandy Xu, equity derivatives strategist at Credit Suisse. “For the S&P, using one month options, skew is in the 95th percentile,” she said, indicating that people are paying more money for downside protection than at most times in the last year.
Reporting by Saqib Iqbal Ahmed. Editing by David Gaffen and John Pickering.