The stock market's "fear gauge" staged its biggest one-session rise in four years Monday as U.S. stocks careened lower in the first trading session since Standard & Poor's Ratings Services cut the credit rating for the United States.
The Chicago Board Options Exchange Volatility index, or VIX, climbed 39% to 44.55 recently as investor fled stocks and pushed Dow Jones Industrial Average down as much as 605 points. Monday's VIX jump marks the biggest percentage rise since Feb. 27, 2007, when the VIX soared 64%.
Monday's intraday highs touched levels not seen since the aftermath of the May 2010 "flash crash," when the measure pushed as high as 48 on an intraday basis. The VIX broke 40 in intraday trade for the first time since May 25, 2010. The VIX measures the price investors pay for protective options contracts on the Standard & Poor's 500 index and tends to rise when stocks fall.
A VIX reading over 40 "says that right now there's uncertainty, there's panic," said Luke Ribahri, partner at Stutland Volatility Group in Chicago. "With the Dow down 500 points on Thursday, nearly 600 points now -- it's scary."
Traders said Standard & Poor downgrade of the U.S. credit rating late Friday to double-A-plus from triple-A compounded fears that global economic growth is slowing.
"It's outright panic," said Andrew Wilkinson, senior market analyst at Interactive Brokers in Greenwich, Conn. of Interactive Brokers.
"Right now, investors are stretching in all directions trying to protect themselves," Mr. Wilkinson said. "Liquidation of portfolios and a general risk-off appetite is causing panic in traditional measures of risk."
Trading volume was robust in the options market as investors heavily favored bearish put options contracts. Nearly 3 puts changed hands for every 2 calls across the options market, a ratio far above the average for the last month, Trade Alert data show.
Options volume was on pace to hit record levels for the third-consecutive session, according to data from OCC, the industry's clearinghouse.
Traders in the options market piled into puts of trading vehicles like the SPDR S&P 500 exchange-traded fund.
In one large options trade in the ETF, traders set up a bearish two-part trade that profits most from a decline in the SPY to $110 by the end of the week. The SPY shed 5.2% to $113.81 in recent trade. Another large options trade in the SPY saw traders close out of an existing September $121 put and extend the hedge into more pessimistic September $115 puts, according to derivatives strategists at Susquehanna Financial Group.
Puts grant the right to sell an underlying security at a set price by a fixed expiration date, while calls grant the right to buy.
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