Fear index ends at record high for second straight day
By Doris Frankel
CHICAGO, Oct 7 (Reuters) - The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's fear gauge, closed at a record high for the second straight day on Tuesday as the widening fallout from the credit crisis drove U.S. stocks sharply lower.
The VIX rose 3.13 percent to close at 53.68. The VIX is up 472 percent from the 9.39 low set in late 2006. On Monday, it closed at 52.05 after posting an all-time intraday high of 58.24.
"Credit concerns continue to dominate trading, driving stock prices lower and volatility higher, said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital in New York. "There is the risk that the market will persist in moving lower, which is driving up put premiums as the major stock benchmarks test key support levels."
The Standard & Poor's 500 Index .SPX dropped 5.74 percent to 996.23 -- the first time the benchmark index has closed below the 1,000 level in more than five years.
The drop was the S&P 500's biggest five-day percentage decline since the 1987 crash.
The VIX tracks projected stock market volatility embedded in near-term S&P 500 option prices and tends to move inversely to the S&P benchmark.
The VIX has stayed at elevated levels as rallies in the equity markets have been short-lived and the S&P 500 falls to new lows and in an increasingly oversold condition.
"Investors are still apprehensive and afraid to step in and buy stocks even though we are seeing levels that would normally be very attractive for institutions and bargain hunters," said Herb Kurlan, chief executive of Vtrader Pro, a proprietary online trading firm in San Francisco. "So they continue to buy put options to protect the downside."
According to option analytics firm Trade Alert, 718,000 puts and 488,000 calls traded in the S&P 500 during the day. Another 1.3 million puts and 1.1 million calls changed hands in the SPDR S&P 500 SPY.A, an exchange-traded fund that holds shares of companies within the S&P 500.
A combination of factors seemed responsible for the steep late-day slide, including the lack of convincing rhetoric from the Fed chairman and concerns that the widening credit crisis will tip the economy into recession, said Frederic Ruffy, options strategist at Web site WhatsTrading.com, in New York.
Federal Reserve Chairman Ben Bernanke signaled a readiness to lower U.S. interest rates as he warned of a worsening economic outlook in remarks to the National Association for Business Economics. An earlier move by the Fed to unclog the commercial paper market, which is widely used by companies to fund their day-to-day operations, sent the VIX briefly lower.
"We saw a drop in the VIX early because of actions of the Fed in trying to shore up the CP market," Kurlan said. "But when Bernanke began to talk about the economy and its prospects, the market reacted with pronounced selling. That increased volatility." (Reporting by Doris Frankel; Editing by Jan Paschal)
