US options traders on edge, eye bond market moves

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - U.S. equity options traders remain on edge, with much of their focus on U.S. Treasuries even as Middle East tensions persist.

The Cboe Volatility Index rose 0.25 points to 17.46 on Tuesday, about 3 points shy of the recent high of 20.78 touched on Friday.

The number of open VIX call options, derivatives contracts that help investors guard against a rise in stock market volatility, stands at about 11 million, near a record high, according to data from options analytics service Trade Alert.

Concerns that the conflict between Israel and Hamas could spread to the region has fueled demand for safe-haven assets such as gold and the U.S. dollar, but Treasury yields still appear to be the main driver for U.S. equities, analysts said.

Investors are chiefly concerned about the Federal Reserve's actions and its impact on stock prices, despite rising geopolitical tension, said Chris Murphy, co-head of derivative strategy at Susquehanna Financial Group.

On Tuesday, Wall Street's main indexes fell as Treasury yields rose following data that showed U.S. retail sales increased more than expected in September, suggesting the economy ended the third quarter on a strong note.

Investors worry that strength in consumer spending could force the Fed to keep interest rates higher for longer.

U.S. Treasury yields have soared in recent weeks to multi-year highs. Higher bond yields, which offer a competing risk-free return, make stocks less attractive to investors.

"With respect to the Israeli situation, no one really knows what it really means for global economic growth ... generally the markets are pretty resilient to that kind of stuff,"

"From a VIX point of view Israel is a bit of a side show," Tallbacken Capital CEO Michael Purves said.

Stock investors are more likely to take their cues from the bond market, Purves said.

The option market, meanwhile, reflects investors' uncertainty about how stocks perform for the rest of the year.

Activity in call options has slowed to the point where it is now slightly below that of put options, Brian Reynolds, chief market strategist at Reynolds Strategy LLC, said in a note.

Calls convey the right to buy shares at a fixed price in the future, while puts offer the right to sell shares.

"The resulting lack of clarity points toward more near-term stock market choppiness and reinforces our desire to sell overheated stock market sectors and accumulate oversold sectors that have improving momentum," Reynolds said.

(Reporting by Saqib Iqbal Ahmed; Editing by Richard Chang)