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'Fear Index' Hits Lowest Number Since Pre-Lehman Collapse

The S&P 500 Volatility Index -- an implied measure of how much stock option prices jump around, sometimes called the "fear index" -- hit its lowest mark today since just before Lehman Brothers collapsed in September.

The Ticker likes to take you beyond the popular numbers, such as the Dow Jones industrial average and unemployment figures, and give you a look at the lesser-known numbers that actually can mean more.

Yesterday, we told you that the LIBOR -- the rate at which banks lend money to one another -- made its steepest drop since March. This means banks are trusting each other more than they did during the crisis last fall.

Today, we take a look at the "VIX," or the Chicago Board Options Exchange Volatility Index. It is a measure of the price volatility of stock options for shares that trade on the S&P 500. It is sometimes called the "fear index."

Traders use options to hedge against future losses. When traders see a volatile market -- a 5 percent jump one day, a 3 percent drop the next -- the price of options rises and the VIX climbs.

When the markets do not fluctuate as much, the VIX drops, as traders see smoother waters ahead and start to feel good again about stocks.

In November, with the markets in disarray and the S&P 500 in freefall, the VIX spiked at around 80.

Today, the VIX broke the 30 floor, its lowest level since Sept. 19, 2008.

In this piece, Barron's explains why traders see a sub-30 VIX as "the financial equivalent of Moses leading his people to the Promised Land after wandering in the desert for 40 years."

But be warned, Barron's cautions: The surge in the stock markets since March (some 30 percent) came with a higher VIX, which tells you that volatility analysis is more complicated than one number.

The VIX offers only a 30-day snapshot of expected volatility. It is not an unqualified, foolproof green light for rushing back into a stock market still finding its legs.

-- Frank Ahrens
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By Frank Ahrens  |  May 19, 2009; 4:44 PM ET
Categories:  The Ticker  | Tags: Barron's, VIX, s&p 500, volatility index  
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