Europe Options Index Rises to 5-Year High After Plan Rejected

By Gareth Gore

Sept. 30 (Bloomberg) -- The benchmark index for European options rallied to the highest in more than five years on concern economic growth will falter after U.S. lawmakers failed to agree on a $700 billion bank rescue plan.

The VStoxx Index rose as much as 8.8 percent to 42.88, the highest since April 2003, and was at 41.86 as of 3:48 p.m. in Frankfurt. The index measures the cost of using options as insurance against declines in the Dow Jones Euro Stoxx 50 Index.

``The fear factor we're seeing in Europe is a direct result of what is happening in the U.S.,'' said Gerry Fowler, head of trading floor strategies at Citigroup Inc. in London. ``Global growth is slowing and we could see the VStoxx go much higher.''

U.S. legislators yesterday rejected the rescue plan in a 228 to 205 vote, sending the Dow Jones Industrial Average tumbling 778 points for its biggest point drop ever and erasing more than $1 trillion in market value. The Standard & Poor's 500 Index fell 8.4 percent, the most since Oct. 26, 1987.

Today's most-active options contracts were puts expiring in December with a strike level of 2,800 points, 6.9 percent below the Euro Stoxx 50's close yesterday. The gauge slid as much as 2.8 percent today and was last at 2,982.31. European-style puts such as those traded on the Euro Stoxx give the buyer the right to sell at a pre-agreed strike price on a specific date.

The VIX, which measures the cost of using options against declines in the Standard & Poor's 500 Index, rose to a record high yesterday. That eclipsed the previous closing record of in October 1998, when the collapse of hedge fund Long-Term Capital Management destabilized markets worldwide.

To contact the reporter on this story: Gareth Gore in Madrid ggore1@bloomberg.net