U.S. Markets open in 8 hrs 32 mins

Wall Street's fear gauge dips on upbeat jobs report

A Wall Street sign is pictured outside the New York Stock Exchange in New York, October 28, 2013. REUTERS/Carlo Allegri

By Saqib Iqbal Ahmed

NEW YORK (Reuters) - Wall Street's fear gauge, the CBOE Volatility Index (.VIX), dipped sharply on Friday after a surprisingly strong jobs report, and there was a surge in put activity in the index's options.

The VIX fell as much as 7 percent to 11.53, its lowest since Sept. 19, after data released Friday showed U.S. employers had added the largest number of workers in nearly three years in November. In late trading, it was down 3 percent at 12.01.

Puts on the VIX, a bet on falling volatility, outnumbered calls by a ratio of 1.6 to 1, according to Trade Alert data.

Puts betting on the VIX settling below 11.50 by December 17 were the most heavily traded options on the index on Friday with volume of 175,000 contracts by 2:30 pm ET (1930 GMT).

While options flow in the VIX is typically dominated by call volume, with average put-to-call ratio at 0.4 for the year, there was massive interest in trading puts this week.

The sharp dip in the VIX has resulted in large paper profits on options trades earlier in the week that bet on the VIX level dropping.

On Tuesday a buyer paid 9 to 13 cents for nearly 200,000 puts at the 12.5 strike and expiring on Dec. 17. The puts are still open and quoted near 29 cents a contract on Friday for a paper profit of nearly $3.2 million, Trade Alert President Henry Schwartz said.

"(The) recent massive blocks of VIX puts have been a hot topic among traders," Schwartz said.

(Reporting by Saqib Iqbal Ahmed; Editing by Nick Zieminski)