VIX Spikes to New Record as Fall in Stocks Resumes (Update: And Then Reverses)

It is nasty out there. From Bloomberg:

The benchmark index for U.S. stock options reached 80 for the first time in its 18-year history, driven higher by equities extending the biggest slide since 1987 on concern the economy will continue deteriorating.

The VIX, as the Chicago Board Options Exchange Volatility Index is known, increased 15 percent to 79.94 at 11:10 a.m. in New York after earlier rising to 80.26. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which lost 4 percent. The S&P 500 tumbled 9 percent yesterday. Today’s VIX record eclipsed the peak of 76.94 on Oct. 10, when U.S. stocks completed their worst week since the 1930s.

“It’s absolutely uncharted territory,” Matt Shapiro, a VIX options trader at Stutland Equities LLC, said in an interview from the CBOE floor. “It’s very frightening and there’s a huge explosion to buy any options on the VIX, especially 70 and 90.”

On the continued fall in stock market averages:

U.S. stocks retreated for a third day, erasing the gains from the biggest rally in seven decades, after Citigroup Inc. said bad loans may rise to a record high and the government said manufacturing fell the most since 1974.

Citigroup declined 8.8 percent after saying loss rates on credit cards and mortgages may climb as the economy deteriorates. American Express Co., the largest U.S. card network by purchases, slid 8.9 percent. General Electric Co., the world’s biggest industrial company, lost 3.6 percent and extended its plunge over the past month to 26 percent.

“The frozen credit markets and the shock coming out of these stresses we’ve had in the capital markets have exacted a toll on the real economy,” U.S. Treasury Secretary Henry Paulson said in an interview with Bloomberg Television. “We’ve seen that in some of the numbers recently. We’re going to have a number of tough months here.”

The Standard & Poor’s 500 Index declined 40.29 points, or 4.4 percent, to 867.55 at 11:12 a.m. in New York, below its lowest close since April 2003. The Dow Jones Industrial Average slid 356.26, or 4.2 percent, to 8,221.65. The Nasdaq Composite Index slipped 54.93 to 1,573.4. Ten stocks dropped for each that rose on the New York Stock Exchange.

The retreat over the past three days erased all of the 12 percent gain in the S&P 500 on Oct. 13, when the

market rallied the most since the 1930s on speculation the government’s plan to shore up banks will ease the credit crisis.

Update 3:40 PM: As market watchers know, the selloff reversed itself just before 3:00 and stocks rallied, with the Dow now up over 200 points. The logic is that lower oil prices are a boon; consumer stocks in particular are up nicely. But as we saw during the commodities boom period, in some days, rising oil prices were argues to have led to a rise in the entire market, and on others, to have precipitated a selloff. Go figure.

From Bloomberg:

U.S. stocks rose for the first time in three days after oil retreated below $70 a barrel, brightening the outlook for consumer companies and overshadowing the biggest slump in industrial production since 1974.

Wal-Mart Stores Inc. and McDonald’s Corp. added more than 5 percent on expectations lower fuel prices will bolster consumer spending. The Dow Jones Industrial Average reversed a decline of as much as 380 points as 23 of its 30 companies advanced.

“You get down to a point where energy starts to be more of a positive than a negative,” said Bruce McCain, chief investment strategist at Key Private Bank in Cleveland, which manages $30 billion. “This is some evidence that the market is not inclined to push to new lows.”

The S&P 500 advanced 26.49 points, or 2.9 percent, to 934.33 at 3:31 p.m. in New York. The Dow Jones Industrial Average rallied 268.97 points, or 3 percent, to 8,846.88. The Nasdaq Composite jumped 3.2 percent to 1,679.86. About five stocks gained for every two that fell on the New York Stock Exchange.

Print Friendly, PDF & Email


  1. Anonymous

    So I guess we can expect the NBER to announce the start of a recession in Q1 the day after the election then?

  2. doc holida

    Oh crap, I guess somebody is having a bad Delta bet, but don't take my word for this!


    FYI: There is also a time effect. Through time, senior and mezzanine tranches become safer relative to equity tranches since less time remains during which the subordination can be reduced resulting in principal losses. This causes the equity tranche delta to rise through time while the mezzanine and senior tranche deltas fall to zero. Building intuition about the delta is not trivial. There are many further dependencies to be explored and we intend to describe thesein a forth coming paper.

    Higher order risks If properly hedged, the dealer should be insensitive to small spread movements. However, this is not a completely risk-free position for the dealer since there are a number of other risk dimensions that have not been immunised. These include correlation sensitivity, recovery rate sensitivity, time decay and spread gamma. There is also a risk to a sudden default which we call the value-on-default risk (VOD). For this reason, dealers are motivated to do trades that reduce these higher order risks. The goal is to flatten the risk of the correlation book with respect to these higher order risks either by doing the off setting trade or by placing different parts of the capital structure with other buyers of customised tranches.

    This relationship is known as the credit tri-angle because it is a relationship between three variables where knowledge of any two is sufficient to calculate the third. It basically states that the spread paid per small time interval exactly compensates the investor for the risk of default per small time interval.

    Within this model the interest rate dependency drops out. Given a CDS which has a flat spread curve at 150bp, and assuming a 50% recovery rate, the implied hazard rate is 0.015 divided by 0.5, which implies a 3% hazard rate. The implied one-year survival probability is therefore exp (–0.03)=97.04%. For two years it is exp (–0.06)=94.18%, and so on.

    >> Did anyone forget to re-adjust assumptions for 50% recovery?

  3. vlade

    do hol:
    “standard” recovery assumption was for the last few years 40%. What it is now, I don’t know but I’m pretty sure it was 40% (for quoting) as recently as few months ago.
    Of course, you as a trader could enter your own assumptions and then trade relative value, but given that until it’s almost default, the sensitivity to the RR is quite small (compared to sensitivity on spreads).

  4. pow wow

    Having denounced yesterday in the ‘Paulson vs. Bank Execs’ thread the lack of Congressional debate and regular order in the passage of the Bailout bill, thanks to undemocratic party leadership dictates, I want to give credit where it’s due: Senator Dodd (with Senator Shelby) is holding, at last, a Banking Committee hearing today featuring non-administration witnesses, to examine the ongoing financial system crisis (“Turmoil in the U.S. Credit Markets: The Genesis of the Current Economic Crisis”). Dodd has also announced plans to introduce a form of 'Main Street' bailout package in the Senate sometime in mid or late November (separately from any "stimulus" package the House and Senate may consider).

    Details, and witness opening statements, here:

    more here:

    C-SPAN has covered the hearing this morning, which means it will be available in their archives, and probably reaired again soon.

    Not only can the oversight function of Congress be exercised when the bodies themselves are adjourned or in recess, but such hearings can work more effectively and with less interruption when held while there is no action taking place on the floor of the Senate or House. So Dodd is forging ahead on that front, as well, by holding this hearing while the Senate is on hiatus, as far more committees of Congress ought to be doing in this environment, on multiple fronts.

    Here's a link to Dodd's new legislative ideas as announced on Wednesday:

    “Dodd also announced several steps he believes Congress must take to help America’s small businesses and families return to prosperity and growth. Dodd intends to incorporate the following principles, focused on American consumers, into a legislative package to help reverse this crisis and revive our economy:”

    At least one Congressional committee finally seems to be stepping up to do its part to help Wall Street ‘get a grip.’

  5. Anonymous

    anyone have any explanation for weird price action over the last hour in QQQQ and SPY. Take a look at a 1/5 min chart.

  6. doc holiday 1.01

    Hey yves, et al,

    New theoretical thought here, stand back.

    What if this is a short term deflationary bubble we are in?

    If one thinks in inverse terms and goes back to say 2004, 2005 and ponders the transition between Greenspan and Bernanke and their relationship to The Ownership Society, and thus Fed rate tinkering, there were many people that felt a bubble was being pumped up in housing and stocks, perhaps assets in general. Hence, what was it that policy critics were screaming for, as the bubble was inflated — and thus, what would be the opposite of that critique now?

    Just a thought, but what if, we are in a period of hyper-activity related to information efficiency, which results in too many people over-reacting to hyper stimulation, as in hyperventilation?

    This would fit well with attention deficit disorder, lotto mentality, Playstationism and a wide range of phycological behavior disorders — which widespread, can cause socialized panics.

    It was just October 2007 that The Dow was at a bubble top at 14,000 and now, its at 8500 with people thinking 3000. What I get out of this is pure volatility and market that decoupled from reality, because it was not regulated and then a bunch of retards made massive derivative bets that caused a global systemic collapse — and now, these same people are probably betting on Dow 1000!

    If the casino mentality is not taken out of investing, there will be zero future value. The market should not crash and it should not spike and if investing is just gambling, we will all lose, because the house always wins!

  7. Matt Dubuque

    In terms of VIX options market makers being a “worthwhile” occupation, it can certainly be a fantastically lucrative one.

    Remember that options premiums waste away EXPONENTIALLY. As you halve the time to expiration, the rate of decay (theta) SQUARES.

    And they do provide a market for those that seek to hedge their portfolios.

    In an allegedly free market, is that all bad?

    Matt Dubuque

  8. Anonymous

    In terms of VIX options market makers being a “worthwhile” occupation, it can certainly be a fantastically lucrative one.

    In other words, they are a parasite.

  9. Carlosjii

    The United States Senate
    7 April 2004
    Dear Mr. Xxxxxxx
    As chairman of the US Senate Banking, Housing and Urban Affairs Committee I will continue to monitor interest rates and their effect on the economy. I am, however, confident in chairman Greenspan’s strong leadership and his aggressive efforts to grow and bolster the economy………
    Richard Shelby

    This was the esteemed Senator’s comment to me about my complaint about Greenspan and his ‘wealth creation’ low interest rates.

    Congress is as much to blame for the financial crisis as anyone – maybe even more. I have asked my Senators Boxer and Feinstein and my ‘Rep’ McKeon – several times in the past 4 months – to tell me how much in contributions they received from FNM and FRE and have not gotten any response

  10. Matt Dubuque

    It’s not being parasitic to sell option premium to those seeking to buy it.

    Something being immensely profitable (which market making by SELLING option premium can be) is not necessarily parasitic; it’s just good business sense, if you know what you’re doing.

    Consider the following two facts:

    1. 95% of people lose money in options.

    2. 95% of the people “investing” in options can’t tell you how to calculate their thetas (rate of premium decay).

    Are those two stats correlated?

    Most floor traders will tell you they are.

    Matt Dubuque

  11. doc holiday

    Somewhat interesting information from a derivative guru, from last year:

    Interview: Jim Finkel, CEO Dynamic Credit – Part I…-credit-part-i/

    Also see: In August 2004, Moody's Corp. unveiled a new credit-rating model that Wall Street banks used to sow the seeds of their own demise. The formula allowed securities firms to sell more top-rated, subprime mortgage-backed bonds than ever before.

  12. doc holiday

    FYI: The Next Housing Catastrophe Waiting to Strike

    Similar, yet so very different
    Lower interest rates may have helped ease the pain inflicted on subprime borrowers with their adjusted reset rates, but option-ARM borrowers are in for a much bigger surprise because their mortgage rates don’t just reset, they recast. This means that borrowers will have to start making full payments on the loan according to a 30-year-amortized schedule. In effect, Fitch Ratings expects the average monthly payment to jump 63%. Given that many borrowers are already defaulting on marginal increases in the minimum payments due, it seems likely the recasting will be catastrophic to most of these borrowers.

    Don’t say we didn’t warn you
    According to Huxley Somerville, a director at Fitch Ratings, $29 billion of these loans will reset by the end of 2009 and another $67 billion in 2010. The drastic increases anticipated on each loan are expected to cause delinquencies to more than double.

  13. luther


    thanks for the article re: ARM.

    i had a feeling something was about to burst there but i couldn’t put my finger on the right data.

    that graph is chilling.

  14. Anonymous

    Pow Wow sings the praises to Senator Dodd for having the courage and leadership required to hold hearings today on the origins of the subprime mess.

    These hearings however, are no more than a thinly disguised attempt at rewritting history, for Mr. Dodd knows all too well the origins of the crisis point directly to his desk.

    The witness list is stacked with either clueless individuals or co-conspirators. Read this mornings’ WS Journal for a more in depth look at this charade.

  15. Anonymous

    .What if this is a short term deflationary bubble we are in?

    It would not be unheard of to follow a deflationary collapse with a rapid inflationary expansion. The last Great Depression featured both in series.

    Prior to 1933 the dollar – gold rate was $20.67 per ounce. Roosevelt criminalized gold money in 1933 and allowed the dollar to float for a year. The oligarchic media of the era said this would help end money hoarding.

    In 1934 his administration established an external exchange rate of $35 per ounce.

    So was the last Great Depression a) deflationary or b) inflationary? Or were both experienced at different points?

    With federal bailout commitments now over $1 trillion and rising I sure wouldn't rule out some inflation down the trail. Particularly since the best and brightest still haven't made any connections between a) genuine economic investment, b) offshoring, c) massive external energy & fuel dependency, d) falling real incomes and e) rapid formation of asset bubbles which then pop.

  16. Anonymous

    It’s like Roger Rabbit hearing Shave and a Haircut: ever pop in the market now brings a chorus of bottom calls.

    700 down yesterday, and not a single mention of capitulation, because it certainly didn’t feel like capitulation.

    Let’s see; the good news:
    Some banks didn’t lose as much money as expected.
    Google came in with good revenue, mainly because people clicked on ads.
    Bonds look unattractive.
    If you ignore earnings and outlook, the market appears oversold.
    Slight thaw in lending.
    Oil dropped near $70 bucks.

    The bad news:
    Manufacturing declined the most since 1974.
    Baltic index says Asia isn’t shipping much.
    Homebuilder sentiment hit an all-time low of 14, with 50 being neutral.
    Gold dropped because hedge funds are selling it to cover redemptions.
    Oil dropped because they don’t see it being used much in the future.

    If I assume the credit crisis was over tomorrow, and banks were lending again because it is guaranteed, then:

    Why would healthy businesses borrow right now? Maybe for retooling, but not to add capacity until demand picks up.

    Will banks lend to distressed companies who want to borrow? Not until demand picks up.

    Do these two conditions favor new hiring, or layoffs?

    When will demand pick up? When the consumer starts buying again, duh.

    Consumers will not buy on credit in a down economy. Consumers might pay down debt with disposable income, or salt it away.

    Prices will decline across the board.

    More mortgage defaults, and an increasing glut of office space. More distress and distrust in MBS’s.

    Wash, rinse, repeat.

    Prone to shocks the whole time, such as bond defaults/CDS events.

    Cities/towns can’t raise capitol, and the government is too busy trying to buy up newly toxic junk, and bailing out bond insurers because they would hate to see the banks fail after all this work to save them.

    I think I am going to increase my SDS positions.

  17. Anonymous

    After reading the explanation of risk analysis above i can clearly see why the ceo’s of the banks had no clue as to what risks they were getting involved with. Geeks gambleing with other peoples money is what isee.

  18. Max

    Financiers, face it – options are pretty much gibberish, and those who buy and sell them are largely nuts, and a portion – crooks.

    You can’t convince any sane person on this planet, that a ten-fold growth in the options market over the past few years was about “hedging portfolios”.

    You can apply calculus to astrology as well, but it doesn’t make it science. Pseudo-science is what it is.

Comments are closed.