Story URL: http://news.medill.northwestern.edu/chicago/news.aspx?id=224892
Story Retrieval Date: 9/21/2014 9:08:05 AM CST

Top Stories
Features
CBOE_outside

Medill News Service

The Chicago Board Options Exchange is home to the VIX, a closely followed fear gauge for the stock market. It fell sharply on relief over the end of the government shutdown.


Drop in volatility measure reflects investor confidence as Congress ends shutdown

by Alexis Prousis
Oct 17, 2013


Investors and traders at the Chicago Board Options Exchange cheered the end of the government shutdown Thursday, sending the Standard and Poor’s 500 Index to record highs and a closely tracked measure of volatility, the VIX, down sharply.

The Standard & Poor’s 500 Index set a fresh record high of 1,733.15 at Thursday's market close, up 11.61, and surpassing the previous record of 1,725.52 set on Sept.18.

The CBOE Volatility Index, or VIX, is a popular fear gauge that measure's the expected future price swings for the Standard and Poor’s 500 Index. It closed Thursday at 13.36, down more than 8 percent for the day. The last time the VIX was at these levels was on Sept. 26, a week before the government shutdown.

Wednesday marked the largest single-day decline in U.S. equity volatility since August 2011, following resolution of an earlier inning in the current fiscal crisis that similarly threatened default on the U.S. debt.


Russell Rhoads, a former investment analyst and trader and current instructor at the CBOE's Options Institute said that “political risk is down because of the end of the government shutdown” which has resulted in the VIX tumbling.

 

“Up until the agreement last night, there was a risk premium in the economy and the market, so the VIX was elevated," Rhoads said.

“For options traders who are getting (stock) portfolio protection for the fourth quarter, the cost of that protection has dropped over the past two days,” he added. 

The VIX is down 25.64 percent year-to-date, usually a sign of calming markets and investor confidence. The Standard and Poor’s 500 Index is up 21.51 percent so far this year. 

The Dow Jones Industrial Average closed 2.18 lower at 15,371.65, while the NASDAQ Composite Index rose 23.71 points to close at 3863.15.