Many options investors scrambled on Friday to hedge their risk on fear of further financial market fallout due to the unrest in Egypt.

Risk perception changed sharply ahead of the weekend, partially in response to mass protests in the largest Middle Eastern nation.

"The market has been ripe for a correction and the unrest in Egypt appears to be the trigger," said Scott Fullman, director of derivative investment strategy at WJB Capital Group. "Not only are we witnessing the unrest, but concerns about what may happen over the weekend has investors and traders now positioning themselves with hedges."

The CBOE Volatility Index, Wall Street's favorite measure of anxiety, known as the VIX, jumped 24 per cent as US stocks slumped.

Overall US option volume was higher than usual for a non-expiration Friday as about 22.5 million contracts changed hands on the day, according to options analytics firm Trade Alert.

The turnover exceeded the average daily volume in January so far of 18.9 million, 9 per cent higher than the trading for January 2010, according to the Options Clearing Corp, which clears all US exchange-listed options.

Activity was heavy with a bias on the put contracts on exchange-traded funds that would give investors insurance against declines in the broad-market averages.

"No one wanted protection heading into Friday," said Chris McKhann, an analyst at Web information site optionMonster.com.

"But traders are apparently looking to insure their positions with put options in the major US equity benchmarks," including exchange-traded funds that track the S&P 500 and the Russell 2000 index.

The VIX stood at 20.04, up 24.09 per cent, its biggest one-day per centage gain since May.

Longer-term futures on the Volatility Index also rose, indicating expectations for more sharp swings in the market in the months ahead.

But it is noteworthy that front-month February VIX futures traded at a discount to spot VIX and closed higher at 19.35.

"This tells us that traders were caught off-guard and did not expect this substantial spike up in the spot VIX and the sharp sell-off in the S&P 500 index," McKhann said.

"They are also pricing in expectations that volatility will not stay this high and will pull back within the next few weeks," he said. "But longer-dated futures still reflect higher volatility expectations."

Option volume across all ETFs listed on exchanges was about 9.06 million contracts, dominated by the trading of 5.65 million puts. For example, puts outpaced calls on the SPDR S&P 500 fund by a factor of 2.25 for every one call, Trade Alert data show. The fund closed down 1.77 per cent to $127.72.

Options activity showed investors taking a bullish stance on oil. In the United States Oil Fund, a large energy-related exchange-traded fund run by United States Commodity Funds, about 242,000 calls and 51,000 puts traded.

That was 4.3 times greater than the average daily volume, according to Trade Alert.

The fund's shares closed up 4.56 per cent at $37.58 after crude oil futures surged more than 4 per cent.

"Some investors are probably speculating on the USO and higher crude prices amid increasing political unrest in Egypt and throughout the Arab world," said WhatsTrading.com options strategist Frederic Ruffy. – Reuters