VIX Surges Most in Year as Stocks Drop on Consumer, CIT Concern

[Joanne98]

Oct. 30 (Bloomberg) -- The benchmark index for U.S. stock options surged the most in a year as demand grew for protection from losses in equities after personal spending fell and investor Carl Icahn supported a CIT Group Inc. bankruptcy.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, jumped 25 percent to 31 at 1:55 p.m. in New York. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which tumbled as much as 3 percent for the steepest slide four months.

“The tone is certainly changing and people are starting to get concerned about a pullback or a correction,” said Carl Mason, head of U.S. equity-derivatives strategy at BNP Paribas SA in New York. “The selloff is pretty severe.”

Commerce Department data showed a 0.5 percent drop in purchases and the Reuters/University of Michigan sentiment index retreated. CIT, the 101-year-old commercial lender trying to fend off collapse, plunged as much as 23 percent as it reached an agreement with billionaire investor Carl Icahn to support its restructuring plan.

The VIX has rebounded since Oct. 22, when it closed at a 2009 low of 20.69. The measure of expected stock-price swings has averaged 20.27 in its 19-year history. It posted a 10-day losing streak, the longest since 2005, earlier this month on speculation $11.6 trillion in government spending and loan guarantees is ending the worst recession in seven decades.

The measure jumped to a record 80.86 in November after New York-based securities firm Lehman Brothers Holdings Inc. filed for bankruptcy, freezing credit markets. The VIX never exceeded 50 before Lehman failed in September 2008. It topped 40 after WorldCom Inc.’s 2002 bankruptcy, the Sept. 11 terrorist attacks, Long-Term Capital Management’s collapse in 1998 and the Asian financial crisis in 1997.

The VIX gauges investor expectations for market swings over the next 30 days using a formula that incorporates the implied volatility, a key gauge of options prices, for S&P 500 puts and calls that are one or two months from expiration.

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