RTRS-Options fear gauge surges on financial worries

By Doris Frankel 17:22 09 Sep 2008

CHICAGO, Sept 9 (Reuters) - The Chicago Board Options Exchange Volatility Index, or VIX <.VIX>, Wall Street's favorite measure of investor fears, spiked upward on Tuesday as renewed worries about the health of the financial sector sent U.S. stocks sharply lower.

The VIX rose 12.5 percent to close at 25.47, its highest level since mid-July. The index's daily percentage gain was the biggest one-day climb since June 26, when the VIX jumped 13.2 percent.

"Again, risk perceptions are higher and the VIX is moving because of the problems in the financials," said Frederic Ruffy, options strategist at Web information site WhatsTrading.com.

While the problems are not new, Ruffy noted they have resurfaced after the government takeover of Fannie Mae and Freddie Mac effectively wiped out the shareholder value in those two mortgage finance giants.

Equities took a beating partly due to the plunge in the shares of Lehman Brothers Holdings Inc on concerns about the ability of Wall Street's fourth largest investment bank to raise much-needed capital.

Lehman shares sank 45 percent to $7.79 on the New York Stock Exchange after earlier hitting its lowest level since October 1998.

The swoon in Lehman shares has reminded many of the Bear Stearns crisis and the loss of counterparty confidence that eventually resulted in a JPMorgan Chase buyout of the investment bank in March, Ruffy said.

Investors had nowhere to hang their hats on as other sectors in the market took a hit. Energy shares tumbled in reaction to a weakening oil market.

The VIX measures anticipated stock market volatility conveyed by Standard & Poor's 500 <.SPX> option prices and typically runs inversely to the benchmark.

It rises to reflect more anxiety in the market as investors bid up options to manage stock market risk.

"Option traders were buying puts and paying higher premiums for protection," said Scott Fullman, director of derivative investment strategy at broker-dealer WJB Capital Group.

The VIX is elevated because the market went down hard led by so many questions in the financial sector, said Joe Kinahan, chief derivatives strategist at online brokerage thinkorswim Group.

The Federal Reserve has received much flak on bailing out companies such as Bear Stearns, leading to the belief that the next financial company that collapses will most likely not be able to rely on the Fed coming to its rescue, he added.

"This heightens fears that there could be more companies out there that have a questionable financial picture," Kinahan said.

((Reporting by Doris Frankel; editing by Gary Crosse))