Options Signal Wake-Up Call On Stock Risk
Rocky Road isn't just an ice-cream flavor any more. It's also a good description of what options traders think lies in store for the stock market.</br></br>As stocks return to record levels, the smooth sailing that characterized stock trading at the end of 2006 and early 2007 isn't likely to return, these traders are signaling by demanding considerably more for options on the Standard & Poor's 500-stock index than they did earlier this year.</br></br>That worry has in turn appeared in readings of the Chicago Board Options Exchange volatility index, or VIX.</br></br>The VIX is derived from options on the S&P 500 and reflects traders' willingness to pay for the protection that these offer. The VIX tends to fall as stocks rise, indicating that worry about stock-market turbulence is abating.</br></br>But on Friday, with stocks racing back toward record levels, the VIX also rose. It gained 0.3, or 2.2%, to 13.94. That's sharply above the low levels at which the index sat for much of late 2006 and early 2007, says Chris Johnson, chief investment strategist at Johnson Research Group.