VIX Options Index Advances to Record Above 60 on Credit Freeze

VIX Options Index Advances to Record Above 60 on Credit Freeze


Oct. 9 (Bloomberg) -- The benchmark index for U.S. stock options surpassed 60 for the first time after the freeze in credit markets drove the Dow Jones Industrial Average to a five- year low below 9,000.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 11 percent to 63.92 after earlier reaching 64.92. Its history stretches back to 1990. The index measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, which lost 7.6 percent. The Dow got as low as 8,579.19.

``It's flashing a signal that equities are very dangerous right now,'' said John Farrall, director of derivatives strategies at National City Private Client Group, which oversees $34 billion in Cleveland, Ohio. ``We'll need to see a sustained market rally or one that swings 1 percent or less for a couple days before you can expect the VIX to come back in to the 40s.''

The cost of borrowing in dollars for three months in London soared to the highest level this year as coordinated interest- rate reductions worldwide failed to revive lending among banks. The London interbank offered rate, or Libor, for three-month loans rose to 4.75 percent today, the highest since Dec. 28.

The S&P 500 has retreated seven straight days, the longest losing streak since 1996, with declines exceeding 1 percent on all but one day. Concern bank writedowns totaling almost $600 billion will spur a global recession sent the benchmark for U.S. equities down 40 percent since its record exactly one year ago.

``We're in uncharted territory,'' said Peter Bottini, executive vice president of trading at OptionsXpress Holdings Inc., a Chicago-based online brokerage. ``It just keeps going higher. There are some pretty panicked buyers of insurance.''

The VXO Volatility Index, a predecessor to the VIX that reflects the price of using options on the S&P 100, added 12 percent to 75.96. Following the October 1987 stock-market crash, it got as high as 172.79.

Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.

BLOOMBERG