10.10.2013
By Terry Flanagan

VIX Trading Gains Amid Debt-Ceiling Showdown

Some fund managers expect volatility to increase ahead of the U.S. debt ceiling deadline as trading in CBOE Volatility Index (VIX) options hit a record this week.

U.S. Treasury Secretary Jack Lew has warned that the country will hit its debt ceiling by October 17 leaving the government unable to meet all of its payment obligations. The U.S. government has partially shut down as the administration and Republicans have been unable to reach an agreement on extending the debt limit to avoid default.

The VIX declined by about 2 points to 17.5 on Thursday morning amid hopeful signs that at least a short-term deal can be reached, but uncertainty lingers.

Philippe Waechter, chief economist at Natixis Asset Management, told Markets Media earlier this week that in France the firm’s clients are staying out of the market as the risk of trying to position themselves ahead of an expected outcome is too high.

“We expect volatility to spike in the coming days and the cost of short-term U.S. debt has gone up rapidly,” Waechter said. “Uncertainty is increasing and we do not see any clue of the picture changing rapidly.”

On October 8 options on the VIX set an all-time, single-day volume record of 1.78 million contracts according to Chicago Board Options Exchange. This beat the previous record of 1.4 million contracts traded on April 15, 2013.

“The major reason is the impact of the U.S. Congress,” said Michael Palmer of Group One Trading. “The VIX index is still low at about 20 and some people see upside while others expect a solution will be reached, so there is room to trade.”

The VIX index is also called the fear gauge as it increases when markets are volatile.

“It is not unreasonable to assume that there will be more trading records before October 17 as there is a lot of speculation on what might happen,” Palmer told Markets Media. “The VIX is the premier volatility product in the world and moments of macro uncertainty like this are when it shines.”

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