October 10, 2008 / 7:36 PM / 11 years ago

UPDATE 3-Wall Street's fear gauge hits record highs

(Adds closing VIX levels and new comments throughout)

By Doris Frankel

CHICAGO, Oct 10 (Reuters) - An index regarded as Wall Street’s fear gauge notched record highs again on Friday, reflecting unprecedented investor anxiety after the broad U.S. stock market fell in a turbulent session.

The Chicago Board Options Exchange Volatility Index, or the VIX .VIX, surged 20.4 percent to an all-time high at 76.94, before closing at 69.95.

The VIX gave up some gains after U.S. stocks staged a late rally, with the Dow Jones industrial average .DJI finishing down 1.5 percent after falling as much as 8 percent earlier.

It was also the worst week on record for the S&P 500, which dropped 1.18 percent to 899.22 points.

The late session rebound came as finance ministers and central bankers from the Group of Seven major industrialized nations gathered in Washington to confront the financial crisis.

“People are hoping that the G7 meeting this weekend results in some sort of coordinated plan which will result in confidence returning to the marketplace,” said Herb Kurlan, chief executive of Vtrader Pro, a proprietary online trading firm in San Francisco.

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

VIX SKY HIGH

“Volatility across global financial markets is unprecedented as investors grapple with ongoing uncertainty about the economic outlook going forward,” said Frederic Ruffy, options strategist at Web site WhatsTrading.com.

The unknowns include: “how bad are the strains in the credit markets? When will the frozen credit pipes thaw? Will it be too late to avert a global recession?,” Ruffy said.

Consequently, investors clamored for portfolio insurance while others speculated on more dramatic swings in the S&P benchmark using a spread trade known as a straddle.

For example, the October 900 straddle closed at $95 as investors bet on more than a 10 percent move up or down from the 900 strike level for the S&P 500 from now to next Friday’s October expiration, said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group in Chicago.

About 884,000 puts and 502,000 calls traded in the S&P 500, a ratio of 1.76 to 1, according to option analytics firm Trade Alert. The ratio over the past 22 days is 1.92, suggesting almost two times more put than call volume in the benchmark, Ruffy said.

But some traders who use the VIX futures on the CBOE Futures Exchange to speculate and hedge portfolios from sudden volatility of the stock market, appear to be expecting the spot VIX to retreat considerably in the next few months.

Front-month October futures came off their new highs and closed at 56.71, up 4.41 points. November and December VIX futures finished at 38.31 and 33.79, respectively.

Still this week’s move by the VIX into unchartered territory astounded investors and veteran VIX watchers.

“I wonder if my kids will look back and talk about the crash of 2008 as people talked about the crash of 1987,” said said Chris McKhann, options analyst at Web information site optionmonster.com in Chicago. (Editing by Leslie Adler)

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