November 20, 2008 / 11:08 PM / in 11 years

Options fear gauge ends at record high as stocks sink

CHICAGO (Reuters) - The Chicago Board Options Exchange Volatility Index, Wall Street’s main barometer of investor fear, ended at a record high on Thursday as U.S. stocks tumbled on concerns of a deep economic slowdown.

The so-called VIX rose 8.89 percent to 80.86, surpassing the previous record close of 80.06 set on October 27.

The VIX measures projected stock market volatility conveyed by Standard & Poor’s 500 index option prices and typically runs inversely to the S&P benchmark.

The VIX spiked higher when a wave of selling drove the S&P 500 to its lowest level since 1997.

As stock prices fell, pressured by ongoing worries about the financial sector and disappointing economic data, anxious investors were inclined to bid up index options to manage their stock market risk.

“Investors are prepared to pay ever increasing premiums to protect their long portfolios from further liquidation and forced selling,” said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

Wilkinson also said that many well-known stocks such as JPMorgan Chase and General Electric had sizable jumps in implied options volatility this morning, reflecting greater uncertainty for their share price prospects.

Economic data on Thursday reinforced the market gloom.

The Conference Board’s index of Leading Economic Indicators fell to its lowest reading in four years in October, factory activity in the U.S. Mid-Atlantic region dropped to an 18-year low in November, and the number of American workers on the unemployment rolls jumped to a 16-year high last week.

The relentless sell-off in some of the largest financial institutions is another reason why risk perceptions have skyrocketed higher, said Frederic Ruffy, options strategist at New York-based Web information site

“Investors are very worried because it appears that the dust has not yet settled in the financial world. Panic is back,” he said.

In the options market, Ruffy noted volume was brisk due to November options expiration this Friday with about 11 million puts and 9 million calls traded on the U.S. options exchanges.

Meanwhile, in the options based on the volatility index, a few investors once again looked to higher strike calls to initiate positions in anticipation of greater volatility by year end, Wilkinson said.

For example in the December 100 VIX call strike, more than 1,500 contracts traded, boosting its existing open interest by a third.

Reporting by Doris Frankel, Editing by Chizu Nomiyama

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