VIX Has Record Point Drop as Fed Boosts Lending, Stocks Rally

By Jeff Kearns

Oct. 13 (Bloomberg) -- The benchmark index for U.S. stock options had the largest one-day point drop in its 18-year history after the Federal Reserve led an unprecedented effort to prop up banks and stocks rallied the most in seven decades.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, fell 14.96, or 21 percent, to 54.99 for the biggest percentage decline since November. It was still the fourth-highest close on record.

The VIX measures the cost of using options as insurance against declines in the Standard & Poor's 500 Index, which jumped 11.6 percent for the biggest gain in almost seven decades. Stocks rallied worldwide after the Fed said central banks will offer financial institutions unlimited dollar funds and Europe pledged to guarantee bank debt issues and permit governments to buy stakes and recapitalize some distressed financial companies.

``It's the lending effort that's giving people some comfort,'' said Neil Davies, a volatility trader and head of structured equity products at SunTrust Robinson Humphrey Capital Markets in Atlanta. ``Until there's further clarity you're going to see the VIX remain high. The fact it's still there tells you people are still a little nervous.''

Volatility benchmarks in the U.S. and Europe soared to records last week on concern the freeze in credit markets will spread from banks to consumer companies and energy producers, triggering a global recession.


Triple the Average

The VIX surged 55 percent last week and reached an intraday record of 76.94 on Oct. 10, more than triple the 24.77 average over the last year. The VIX had never exceeded 50 before Oct. 6.

``Though it's come down 15 points from where it was Friday we're still at record levels,'' Michael James, a managing director at Wedbush Morgan Securities in Los Angeles, said in an interview with Bloomberg Radio. ``There's continued nervousness, as there should be, but the effect from the European banks makes it easier for people to feel a little better about the stability of the financial system.''

Of today's eight most-active options tied to the VIX, only the October 50 puts advanced, adding 14 percent to $4.20. November VIX futures lost 5.9 percent to 36.07. January futures fell 5.9 percent to 30.52.

The gap between the VIX and the CBOE's RVX, a similar index that tracks options on the Russell 2000 Index, widened to 10.55, the most since August 2006. The RVX fell 7.3 percent to 65.54, while the benchmark for small U.S. stocks added 9.3 percent.

Nasdaq-100

The CBOE's NDX Volatility Index, based on prices paid for options on the Nasdaq-100 Index, fell 16 percent to 60.27. The Nasdaq-100, which gets 61 percent of its value from technology companies, jumped 13 percent as all but one company advanced.

In Europe, the benchmark gauge of stock-market volatility fell the most in three years. The VStoxx Index, which measures the cost of protecting against a decline in shares on the Dow Jones Euro Stoxx 50 Index, retreated 17 percent to 67.05, the second-highest close in its eight-year history. The Euro Stoxx 50 rose 11 percent.

The VDAX-New, the benchmark gauge of German stock-market volatility, slid 4.6 percent to 61.27 in Frankfurt. The measure is derived from prices paid for options on the DAX Index, which rallied 11 percent for the biggest jump since its creation two decades ago.

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.