By Angela Moon
NEW YORK (Reuters) - Investors are using optionsto brace for big swings next week as Wall Street enters thepeak of the most volatile month for stocks historically.
Options on the CBOE Volatility Index , Wall Street'sso-called fear gauge, were one of the top-traded contracts inthe options market as investors made bets on a sharp jump inthe index.
Next week "is the real start of a month to be nervousabout," said Brian Overby, senior options analyst at onlinebrokerage TradeKing in Charlotte, North Carolina.
"Especially, because the volatility has come off so much,there is a lot of complacency in the market. So if we get one(item of) bad news, that will cause a big jump."
September is typically a weak month for stocks, andvolatility reaches its peak as traders are fully back to workfrom summer holidays.
The largest open interest on VIX options was on the Sept$45 calls, suggesting some investors were betting on the gaugeto double the current level by next week's expiration, saidRyan Detrick, senior technical analyst at Schaeffer'sInvestment Research in Cincinnati, Ohio.
"With less than one more week to go, unless somethingtragic happens, it is unlikely that the VIX would double. Butthe bottom line is, people are hedging themselves a lot more,preparing themselves for big moves," he said.
On Friday, about 145,000 calls traded in VIX options, whichare priced off of VIX futures, versus 46,000 puts, according tooptions analytic firm Trade Alert.
The VIX closed down 4 percent to 21.99, below its 200-daymoving average. But the index was up 3.2 percent on the week,having fallen more than 12 percent in the previous week.
The index usually has an inverse relationship with theStandard & Poor's 500 benchmark as it tracks option prices thatinvestors are willing to pay as a protection on the underlyingstocks.
BEARISH SENTIMENT CONTINUES
The Dow and S&P 500 closed the week withtheir seventh gain in eight sessions in a turnaround period forstocks that has seen investors' worst fears about the economystart to dissipate.
But the gains were made on the second lightest tradingvolume of the year so far as investors remained on guard formore deterioration in the market.
Michael Shea, managing partner at Direct Access Partners inNew York, said the bears continue to be more active at the highend of the range.
"It's Datapalooza next week... If all the data points inone direction, which is unlikely, you might see a moresubstantive shift in sentiment. (But) getting a mixed messageis the more likely outcome, perpetuating this current inertiawe are experiencing," he said.
Next week's economic calendar includes retail sales due onTuesday, industrial production and capacity utilization onWednesday, the Producer Price Index and jobless claims onThursday and then the Consumer Price Index and University ofMichigan/Thomson Reuters consumer confidence on Friday.
Adding to volatility, Friday also marks the end of the"quadruple witching" period - the quarterly settlement andexpiration of four different types of September equity futuresand options contracts.
Expiration usually leads to greater volume and volatilityas players adjust or exercise their derivative positions.
But the two-day event, which only happens four times a yearin March, June, September and December, could stir up moresudden swings in the market as traders close hedging positionsor roll them over at the last minute. (Reporting by Angela Moon; Additional Reporting by DorisFrankel; Editing by Kenneth Barry)