Options investors are paying twice this decade’s average to protect against losses in U.S. stocks through 2011, signaling the bear market that already wiped out $10.4 trillion of equity value may last two more years.

“There’s a real panic in the markets, with some people wanting to buy long-term insurance at any price,” said Peter Sorrentino, who helps manage $16 billion, including $130 million in options at Huntington Asset Advisors Inc. in Cincinnati. “People have lost hope.”

Contracts to protect against a decline in the Standard & Poor’s 500 Index for two years cost $15,160 on the Chicago Board Options Exchange at the end of last week, compared with $6,875 in 2007, according to price-adjusted data compiled by Bloomberg. The current level shows traders expect the benchmark gauge for U.S. equities to fluctuate twice as much in the next two years as it has since 2000.

U.S. stocks fell today, driving the Dow Jones Industrial Average below 7,000 for the first time since 1997, after Warren Buffett said the economy is in “shambles” and American International Group Inc. reported the largest corporate loss in U.S. history.

Levels of volatility show traders are using options to prepare for the longest bear market since 2002. They’re at odds with the prevailing view of Wall Street strategists, who forecast the S&P 500 will rebound 37 percent to end the year at 1,010, based on 10 estimates compiled by Bloomberg News.
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“The market expects further unforeseen shocks,” said Simon Emrich, head of North American quantitative derivatives strategies at Morgan Stanley in New York.

John Bogle, who created the $68.8 billion Vanguard 500 Index Fund, said in a Bloomberg Television interview from Washington on Feb. 24 that the U.S. recession may linger into 2011. Bank of England policy maker David Blanchflower predicted a day later that the slump in the U.K. might intensify “significantly.”
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