VIX `Exploding' as Stocks Plunge on Growing Recession Concern

By Jeff Kearns

Oct. 15 (Bloomberg) -- The benchmark index for U.S. stock options jumped to the second-highest close in its 18-year history after a slump in retail sales heightened concern the nation may not avoid a prolonged recession.

``Volatility is exploding,'' Brian Stutland, president of Stutland Equities LLC, said in a Bloomberg Television interview from the Chicago Board Options Exchange floor. ``People's outlook on the entire U.S. economy is changing.''

The VIX, as the CBOE Volatility Index is known, surged 26 percent to 69.25, or almost triple its average during the past year. Before last week, the VIX had never closed over 50. The VIX measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, which tumbled 9 percent for the steepest slide since the 1987 crash.

The VIX is ``like blood pressure and it's through the roof,'' said John O'Donoghue, co-head of trading at Cowen & Co. in New York. ``The levels of bearish sentiment we're seeing we haven't seen in years.''

October VIX futures, which expire in a week, added 9.3 percent to 58.36. November futures rose 5.1 percent to 43.01.

The VXO Volatility Index, a predecessor to the VIX that reflects the price of options on the S&P 100, climbed 17 percent to 68.35, the third-highest close since October 1987. The index, known as the ``old VIX,'' reached an intraday record of 172.79, the highest in its almost 23-year history, a day after the 1987 stock-market crash.


Consumer purchases fell 1.2 percent in September, almost twice analysts' estimate. The decline marked the third-straight monthly retreat, the first time that's happened since comparable records began in 1992, according to the Commerce Department.

``The consumer is having a lot of problems,'' said Thomas Lee, chief U.S. equity strategist at JPMorgan Chase & Co. in New York. ``Credit availability does seem to have produced a big shock throughout the U.S. economy.''

Investors use options to guard against fluctuations in the price of securities they own, speculate on share-price moves or bet that volatility, or stock swings, will increase or decrease.

To contact the reporter on this story: Jeff Kearns in New York at jkearns3@bloomberg.net.