Wall Street's fear gauge surges to new highs again

CHICAGO (Reuters) - An index regarded as Wall Street’s fear gauge hit record highs once again on Friday, reflecting unprecedented investor anxiety after U.S. stocks tumbled on fears that tight credit would spawn worldwide recession.

The Chicago Board Options Exchange Volatility Index .VIX, popularly called the VIX, jumped 16.49 percent to an all-time intraday high of 74.46 near noon. The index had already topped a 60 reading for the first time on Thursday and has closed above a 50 reading for four straight sessions.

The VIX tracks projected stock market volatility conveyed by the option prices for the Standard & Poor's 500 index .SPX and generally moves inversely to the benchmark.

In this high volatility environment, investors have driven up the cost of S&P 500 options, pushing the calculation of the VIX to extreme levels.

“You are reaching excesses right now, and until we see a stabilization in the market, we are likely to see implied volatility levels remain elevated for the foreseeable future,” said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital in New York.

He noted that historic and implied levels for the S&P 500 benchmark as well as for many stocks and exchange-traded funds that trade options, have seen near parabolic rises over the past week.

“The market is reacting to the credit crisis and its impact on the world economies,” Fullman said.

At about 12:25 p.m. in New York, the VIX was up 14 percent at 72.88, slightly below its record intraday high so far. The Standard & Poor's 500 Index .SPX was down 33.79 points, or 3.71 percent, at 876.13 -- close to where it was trading on October 17, 2001, a month after the U.S. stock market reopened following the September 11 attacks on the United States.

Front-month futures pegged to the VIX, which are due to expire this month, are signaling volatility will come down somewhat in the near-term but will remain at historical highs.

“There are only 11 days until expiration for the October VIX futures and options. The highest settlement we have seen since the VIX futures started trading in 2004 was just above a 30 reading for the VIX,” said Chris McKhann, analyst at Web information site, in Chicago.

He noted if volatility stays this high, he is looking for a settlement of at least above a 55 reading. Front-month October futures traded on the CBOE Futures Exchange stood at 56.50, up 4.20 points shortly after noon Eastern time.

“This is very important. We have never seen the VIX this high at least in its current format created in 2003,” he said.

“The panic is full-fledged. A lot of people believe that when the VIX spikes to a certain level, the market will turn around. But so far, that has not occurred even when the VIX hit 40, 50 and 60 levels. Now we are above 70 today,” McKhann said.

The VIX is at exceptional highs because global financial markets remain volatile and fear is at extremes. Markets in Asia and Europe were hit with another round of staggering losses overnight.

“Contagion spread like wildfire across the globe,” said Frederic Ruffy, options strategist at Web site in New York.

Editing by Jan Paschal