Volatility index hits low

Wall Street's main barometer of investor sentiment did not show much fear overnight, as it sank to its lowest level in 15 months.

The Chicago Board Options Exchange Volatility Index, known as the VIX, dropped to 20.42, off 0.24 percent, after falling as low as 20.05, a level not seen since August 2008, as stocks rose in a quiet week marked by low trading volumes.

The VIX may also reflect the adjustment of S&P 500 index option prices this holiday week due to time erosion, one of the elements of an option's value.

"Nobody expects big swings in the market for this week," said Joe Kinahan, chief derivatives strategist at TD Ameritrade.

The VIX is a 30-day risk forecast based on Standard & Poor's 500 index option prices. It often falls as anxiety subsides when stocks rise and market participants become more confident or complacent about the market.

"The VIX ... at the lower end of its recent range and there are expectations for quiet trading and low levels of market volatility heading into December," said WhatsTrading.com option strategist Frederic Ruffy.

TIME DECAY A FACTOR

In addition to a relatively sanguine outlook as stocks rise, because U.S. financial markets will be closed on Thursday for the Thanksgiving holiday and will close early on Friday, some traders may be re-pricing options, factoring in the erosion of time in an options price.

Time is one of the components that determine the value of an option, and short-term options see a faster rate of time decay, or loss of value, when compared to longer-term options.

"Time premium has to come out between today and Monday so traders are going to factor this in to their options pricing," Kinahan said.

Traders, however, still expect additional volatility going forward. VIX futures contracts are continuing to trade at a premium to spot VIX, which would suggest a lower S&P 500, said optionMonster analyst Chris McKhann.

In afternoon trade, VIX December futures moved down to 22.73 while January futures were at 25.83. The rest of the board for 2010 was near a 27 reading or above that level, Reuters data show, suggesting investors are still concerned about future gyrations in the market.

- Reuters