(Bloomberg News) Traders are selling an exchange-traded note that tracks U.S. equity volatility, betting losses in the Standard & Poor's 500 Index will slow, after the biggest share swings ever drove the VIX to a 2 1/2-year high.

Outstanding stock in Barclays Plc's iPath S&P 500 VIX Short-Term Futures ETN, which rallies when volatility increases, plunged 48 percent last week for the biggest drop in its 30- month history. More than 19 million shares have been erased in the last seven days, data compiled by Bloomberg show. Credit Suisse Group AG's VelocityShares Daily Inverse VIX Short Term ETN, a bet the gauge will fall, rose to a record 65.6 million shares, becoming the second-largest ETN tied to equity swings.

Volatility securities had record volume last week as traders bet on fluctuations in the VIX, which has moved in the opposite direction of the S&P 500 about 85 percent of the time in the last two years. Investors are wagering that the index, which measures the cost of options to protect S&P 500 shares, will decline from last week's two-year high and return to its historical average.

"It's a good bet," Michael Corcelli, who has sold VXX call options, said in a telephone interview yesterday. He is a managing member of Alexander Alternative Capital LLC, a Miami- based hedge fund that invests in equity-index options. "While I'm not wildly bullish on the economy, there's been a tremendous amount of work done to cushion the landing from the macro standpoint on all these catastrophic risks."

Rising Volatility

Unprecedented swings in the S&P 500 pushed the VIX, as the Chicago Board Options Exchange Volatility Index is known, up 50 percent to 48 on Aug. 8, the biggest surge since February 2007 and the highest level since March 2009, then down 27 percent the next day for the second-largest drop. The VIX, which has averaged 20.36 over its 21-year history, fell to a 12-year intraday low of 9.39 in December 2006 then soared to an intraday record 89.53 in October 2008.

"It always reverts to the mean. That's an easy call to make," Randy Frederick, the Austin, Texas-based director of trading and derivatives for Charles Schwab Corp., which has 8 million brokerage accounts, said in a phone interview yesterday. "The tough part is to say how quickly it's going to do that. It always reverts back when you get extreme spikes, but the question is how extreme."

The S&P 500 has tumbled 13 percent from its April 29 high on concern the U.S. economy will enter its second recession in three years. The benchmark gauge for American equity lost 6.7 percent on Aug. 8, the first day of trading after S&P stripped the U.S. government of its AAA credit rating, and plunged 4.4 percent two days later amid signs Europe's debt crisis would spread.

Cheapest Since 2009

The decline has pushed the S&P 500's valuation to as low as 12.1 times earnings in the last 12 months, the lowest level since 2009, when the rally that lifted the index as much as 102 percent began. Earnings among companies in the gauge are projected to climb 17 percent to $99.18 a share this year and 14 percent to $113.05 in 2012, according to analyst estimates compiled by Bloomberg.

ETNs, which are unsecured bank debt, are backed by their issuer's credit, unlike exchange-traded funds, which hold assets. Banks create and redeem shares of ETNs based on the level of demand for the securities. That demand doesn't affect the price since the ETNs track the performance of an index.