The Wall Street Journal-20080123-Fear Gauge Hits 5-Year High- And Some See It Rising More
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Fear Gauge Hits 5-Year High, And Some See It Rising More
A global stock selloff and protective rate cut from the Federal Reserve made yesterday's theme wariness mixed with possibility, as traders turned to the options market for protection from future turbulence.
During the early morning nose-dive in U.S. stocks, a main measure of investor anxiety soared to its highest level in more than five years.
The Chicago Board Options Exchange volatility index, or VIX, briefly touched 37.57, breaching a high from last August to reach the highest point since October 2002. The VIX regained some ground to end the session at 31.01, up 14.1%, and its highest close since mid-November.
The VIX is commonly called the "fear gauge," reflecting its role as a yardstick for future swings in the markets.
Despite the uptick, some analysts said VIX levels haven't yet caught up to the broad January selloff in equity markets, and could be poised for a further surge. Coming days may be telling as investors digest earnings reports and next week's meeting of Fed policy makers.
Still, optimism was evident in the many investors who used the market selloff as an opportunity to pick up call options on weak sectors. The Financial Select Sector SPDR, an exchange-traded fund on the battered financial industry, drew fresh option trading as investors hoped the worst was over for many banks, bond firms and brokerages.
Some analysts cautioned a recovery in the financials ETF, which gained 2.2% to 26.05, was a false bottom.
Still other traders turned to call options on the VIX to profit as expectations for stock-market turbulence rise.
Options on the VIX traded briskly, with more than 141,000 call contracts changing hands, about 1 1/2 times the average daily volume for January. Calls, which pay off if markets begin to price in higher levels of volatility, out-traded puts by nearly 5 to 1.
Investors who built up call options expecting an uptick in the VIX were rewarded. February contracts at the 30 strike price could be bought for as little as 80 cents a few days ago. By yesterday, those February 30 calls were changing hands at $1.90.
