U.S. Stock Market Stumble Presaged by S&P 500 Options

By Jeff Kearns and Michael Tsang

Oct. 8 (Bloomberg) -- Skittishness over the U.S. stock market's record-setting rally is reaching a crescendo among options traders who are preparing for a crash.

Investors are paying the most ever to protect against a drop in the Standard & Poor's 500 Index, data compiled by Morgan Stanley show. The gap between the price of so-called put options on the benchmark for U.S. equity and the cost to wager on further gains has averaged about 8 percentage points since August. That's more than the previous high in July 2001, before the index dropped 34 percent and fell to the lowest this decade.

The widening spread is a warning for OppenheimerFunds Inc. and Harris Private Bank, which oversee more than $300 billion and say the bearish bets indicate stocks may fall. The S&P 500 rebounded 10 percent since Aug. 15 on speculation the worst is over for banks and homebuilders hurt by the collapse of subprime mortgages. Shares in developed markets outside the U.S. have done even better, climbing 14 percent from their trough.

``Battle-scarred investors are buying some insurance this time around, having the benefit of hindsight,'' said Jack Ablin, who oversees about $50 billion as chief investment officer at Harris Private Bank in Chicago. Ablin said he bought put options for clients during the rally. BLOOMBERG