Wednesday's VIX 'Carpet Bomb'

UPDATE: No Reason To Fear Wednesday's VIX 'Carpet Bomb'
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.StumbleUponDiggTwitterYahoo BuzzFarkRedditLinkedIndel.icio.usMySpace Text (Updates to add market activity and index moves) By Brendan Conway Of DOW JONES NEWSWIRES NEW YORK (Dow Jones)--Investors looking at Wednesday's bump in the market's "fear index" and heavy options trading on the Standard & Poor's 500-stock index should not be spooked. Traders call it a "carpet bomb."

Every month, as options and futures on the VIX volatility index expire, traders have a chance to influence the settlement in ways that can earn them short-term profits. This sometimes causes the VIX itself to shoot up or down because those options are used to calculate the index.

The VIX staged a modest 3.7% gain Wednesday morning to a high of 25.23. Tens of thousands of S&P 500 contracts have traded so far, above normal levels. The VIX has since quieted and is off 0.02 recently, or 0.1%, to 24.31.

This "carpet bomb" happens every month and, in some cases, the activity may appear worrisome to investors who follow the VIX but don't often watch the S&P 500 options. It isn't.

It has little bearing on stock fundamentals, since the moves reflect short-term efforts to push the VIX settlement and also reflects portfolio adjustments in the wake of the August expiration.

The appearance to investors who don't know this can be disquieting, though.

Wednesday's trading volume is sizeable in S&P 500 options as low as the 650 level--contracts an investor would buy if he or she thought a dive in the S&P 500 beneath those levels was possible.

The index is down modestly, off 2.33, or 0.21%, to 1090.21.