Wall Street sank on Friday, with the benchmark S&P 500 hitting its lowest level since October 2014, as oil prices fell below $30 per barrel.
The CBOE Volatility Index, the market's favored barometer of volatility, hit a high of 30.95, highest since September. It was last up 22 percent at 29.31.
More than 11 million contracts traded by noon, 60 percent greater than the normal pace, and trading volume was on track to hit 25.4 million, making it the busiest day in a month, according to options analytics firm Trade Alert.
"We have been seeing a lot of rolls out of January options this week, especially in puts," said Scott Fullman, chief strategist at Revere Securities Corp.
Rolling refers to the closing of an existing position and replacing it with contracts with an expiration that is further out in time.
"There are a lot of investors and fund managers that are implementing or adjusting hedges," he said.
But surging volatility makes buying protection an expensive affair.
"You have to spend twice as much to buy the same protection you did a month or two months ago," said Neil Azous, founder of Stamford, Connecticut-based advisory firm Rareview Macro. "It's a very difficult pill to swallow."
Investors are left with two painful choices; to shell out to buy expensive protection or to simply reduce their outright exposure to stocks. Both of these activities could potentially add to the selling pressure, Azous said.
The January options expiration is particularly busy since it is also when Long-term Equity AnticiPation Securities, known as LEAPS, expire. These are options contracts with expiration dates of up to three years in the future and have been listed for years.
Traders also appeared to be loading up on protection with an eye on the three-day holiday weekend, Revere Securities' Fullman said. Monday is a federal U.S. holiday for Martin Luther King, Jr. Day.
(Editing by Bernadette Baum)
By Saqib Iqbal Ahmed
