New York: The biggest sell-off in the Standard & Poor's 500 Index since March is rewarding options traders who bet on a surge in volatility with gains of 75 per cent.

"It's been a nice shift for some people," Justin Golden, a strategist at New York-based Macro Risk Advisors LLC, which advises institutions on equity derivatives, said. "Before this week, the long options community had been very frustrated. Volatility has been on a downward path."

Traders who buy options that gain in value when the VIX rises are usually betting equities will retreat because the volatility gauge moves in the opposite direction of the S&P 500 more than 80 per cent of the time. Financial and technology stocks led the market lower on Friday as some Democrats said they will oppose Ben Bernanke for another term as head of the Federal Reserve and results at Google Inc., the Mountain View, California, owner of the world's most popular search engine, disappointed investors.

Wagers that the Chicago Board Options Exchange Volatility Index would jump 46 per cent to 32.5 were the most-active contract on January 20 and 21, according to data compiled by Bloomberg.

Corresponding increase

An increase to that level corresponded with a decline of about three per cent in the Standard & Poor's 500 Index, Randy Frederick, the Austin, Texas-based director of trading and derivatives at Charles Schwab & Co, said.

The benchmark gauge for US equities fell 2.2 per cent on Friday, capping its biggest three-day retreat in 10 months. The VIX, which is derived from the price of options on the S&P 500, has risen 55 per cent to 27.31 in that period, the most since February 2007, according to data compiled by Bloomberg.

Equities around the world declined since January 20, following a White House proposal to reduce risk-taking at banks and signs China will take more steps to slow economic growth. The Dow Jones Industrial Average lost two per cent on January 21 to erase its gain for 2010 and fell 2.1 per cent on Friday.

The surge in volatility has been "pretty significant for the VIX," Stefen Choy, founder of Livevol Inc., a San Francisco-based provider of options market data and analytics, said. "Maybe people are starting to feel that the market is running out of steam."

Contract climb

About 64,000 February 32.50 calls on the VIX traded on January 20 and 21. The contracts climbed 75 per cent to $1.05 and have almost quadrupled in price since January 19. The options gauge, which averaged 20.28 over its 19-year history and 31.5 in 2008, last closed above 32.5 on June 16.

Eighty-nine per cent of the contracts that changed hands on January 20 and 21 traded on the ask price, which indicates they were initiated by buyers.

Investors have also sought protection by purchasing shares of the iPath S&P 500 VIX Short-Term Futures exchange-traded note, which increased 8.8 per cent to $31.89 on Friday. Volume jumped to 11.6 million, the highest level since the ETN began trading almost a year ago and more than twice the 4.56 million four-week average.

The number of shares outstanding has doubled in the last six weeks to 40,447. The VXX, as the note is known, tracks futures for the options benchmark.

VIX futures that expire in March gained 4.4 per cent to 25.15 on Friday, while April's added 3.3 per cent to 25.35.