VIX Closes at Highest Since March 2003 on Bear Stearns Bailout
By Michael Patterson
March 14 (Bloomberg) -- The benchmark for U.S. stock option prices closed at the highest level since March 2003 after Bear Stearns Cos. got an emergency bailout from the Federal Reserve and JPMorgan Chase & Co.
The Chicago Board Options Exchange Volatility Index rose 14 percent to 31.16 for the biggest advance since Jan. 17. The so- called VIX, which tends to increase when stocks fall, has gained 80 percent in the past year.
``This is just an emotionally charged time right now,'' said Bud Haslett, director of option analytics at Miller Tabak & Co. in New York. ``With all that uncertainty, it seems like we're really getting a breakout here in the level of the VIX.''
Higher readings in the VIX, derived from prices paid for Standard & Poor's 500 Index options, indicate traders expect larger share-price swings in the next 30 days. The S&P 500 dropped 2.1 percent to 1,288.14 today.
Options traders increased bets that Bear Stearns will collapse after Chief Executive Officer Alan Schwartz said the brokerage's cash position ``significantly deteriorated'' in the past day.
Implied volatility, a measure of how much investors are paying to insure against further stock-price losses, surged past 300 for the New York-based securities firm. That's a level Ambac Financial Group Inc. and Thornburg Mortgage Inc. reached this year as investors sold stock on concern the companies may fail.
``That type of implied volatility is telling you zero is a distinct possibility'' for Bear Stearns shares, said Michael McCarty, an options strategist at Meridian Equity Partners Inc. in New York.
Nine-Year Low
Bear Stearns, the fifth-largest U.S. securities firm, tumbled as much as 53 percent to a nine-year low of $26.85 on the New York Stock Exchange today, its biggest plunge ever. The company has lost 79 percent of its market value in the past year. The most-active options yesterday were puts that give the right to sell the stock for $25 through March 20.
``That's incredibly aggressive,'' McCarty said. ``Someone was intimately familiar with the timing.''
Bear Stearns got emergency funding today from JPMorgan and the New York Fed, which agreed to provide financing through JPMorgan for up to 28 days, according to a statement.
For March $25 puts to pay off, Bear Stearns shares would have to drop 56 percent from yesterday's close of $57. Those contracts surged 82-fold to $4.10 in the past two days. Implied volatility more than doubled to 251.43 today, paring its earlier advance. Bear Stearns shares fell $27, or 47 percent, to $30 at the close.
`Could Become Worthless'
The stock ``could become worthless'' if Bear Stearns is forced to sell assets, according to Oppenheimer & Co.'s Meredith Whitney. She downgraded the company to ``underperform'' from ``market perform.''
``This investment simply is mired in too much risk, even at these levels,'' the analyst wrote in a report today.
Implied volatility for Lehman Brothers Holdings Inc., the fourth-biggest U.S. securities firm, more than doubled to 147.78. The most-active contracts were March $40 puts and April $20 puts, which surged 418 percent and 1,200 percent, respectively.
Lehman shares dropped the most since April 2000, losing 15 percent to $39.26.
To contact the reporter on this story: Michael Patterson in New York at [email protected]. Last Updated: March 14, 2008 16:37 EDT
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