CHICAGO Nov 4 An index regarded as Wall
Street's main barometer of investor fear dropped sharply on
Tuesday as U.S. stocks rallied on election day.
The Chicago Board Options Exchange Volatility Index,
commonly called the VIX .VIX, dropped 10.88 percent to 47.84
after posting a session low of 44.25.
Volatility has now contracted significantly after setting
a record high of 89.53 in the turbulent month of October.
"The VIX is down because the market loves certainty and
within 24 hours, we should know who our next president will
be," said Joe Kinahan, chief derivatives strategist at
Chicago-based online brokerage thinkorswim Group.
But he noted the VIX is still at an historically high
level as a change in leadership is not expected to immediately
wipe out concerns about the U.S. economy's health.
"We still have economic problems. But the biggest
difference is that the fear of a total financial system
collapse has been mitigated," Kinahan added.
U.S. stocks climbed as investors picked up shares trading
around five-year lows amid further signs of easing in credit
The broad Standard & Poor's 500 Index .SPX shot up 3
percent to 995.72, near its session high, in mid-afternoon
trading. The Dow Jones industrial average .DJI gained more
than 200 points, or 2.4 percent, to 9,539, while the Nasdaq
Composite Index .IXIC shot up 2.4 percent, or 41 points, to
A lot of stocks that have been beaten up in the market's
steep decline of the past couple of months have shown good
resilience, analysts and traders said.
"They seem to be absorbing any additional selling and
recovering very quickly," said Herb Kurlan, chief executive of
Vtrader Pro, a proprietary online trading firm in San
BETTER CREDIT MARKETS EXPECTED
The VIX measures projected stock market volatility
embedded in near-term Standard & Poor's 500 index options and
typically runs inversely to the S&P benchmark.
It tends to fall when investors are more complacent about
current stock levels and as a result, they are more likely to
reduce option hedges as a way to offset stock market risk.
"There is a sense that there will be more stability in
trading for the rest of the fourth quarter," said Scott
Fullman, director of derivative investment strategy at
broker-dealer WJB Capital in New York.
"It appears that options are being priced for lower risk
and lower perceived volatility following the U.S. presidential
election due to the expected improvement in the credit
markets," Fullman said.
At a 46 reading, the VIX is significantly below the
near-term actual volatility level of 84.2 percent for the S&P
benchmark, said Frederic Ruffy, options strategist at New
York-based Web information site WhatsTrading.com.
"The big difference between the 20-day actual volatility
and the current readings from the VIX seems to reflect a sense
of growing optimism among investors," Ruffy said. "This is
probably due to the fact that November and December are months
that are historically a lot less volatile than October."
Investors believe there is not a rush to own put options
to protect their portfolios, which translates immediately to a
significant drop in volatility as measured by the VIX,
Vtrader's Kurlan said.
Another notable sign: During Tuesday's session, the cash
VIX hit a level that was below the front-month November VIX
futures contract on the CBOE futures exchange. In afternoon
trade, November VIX futures stood at 46.49 after hitting a low
"That's the first time since early September that the
premium has shunk to parity with the future. We had been up as
much as 24 points over the future, so this is record
shrinkage," said Jon Najarian, on his Web information site
(Reporting by Doris Frankel; Editing by Jan Paschal)