VIX Rises 14% to Highest Level in Four Months on Debt Impasse

U.S. Senate Majority Leader Harry Reid
U.S. Senate Majority Leader Harry Reid. Photographer: Andrew Harrer/Bloomberg

U.S. equity derivatives surged, sending the Chicago Board Options Exchange Volatility Index to the highest level in four months, as a stalemate over the debt ceiling pushed the nation closer to default.

The VIX, as the measure is known, rose 14 percent to 22.98, a level last reached on March 18. VIX August futures added 8.4 percent to 21.3, while September futures gained 5.1 percent to 21.75. The gauge tracks the cost of options linked to the Standard & Poor’s 500 index, which lost 2 percent.

The VIX has risen 31 percent in the past three days as politicians grapple with raising the U.S. debt limit and cutting the budget deficit. House Speaker John Boehner’s reworked deficit-cutting plan gained support today among his fellow Republicans, while Senate Majority Leader Harry Reid said his competing proposal to avert a potential U.S. default offers the only “true compromise.”

“With all the politicians saying we’ve got to get this done and all the fearmongering, traders and investors are getting scared,” Brenna Hardman, a derivatives broker at MEB Options LLC, said in a telephone interview from the Chicago Board Options Exchange floor. “It creates a lot of fear, and as fear on the street goes up, so does the VIX.”

Less than a week from an Aug. 2 deadline to raise the nation’s $14.3 trillion debt limit, Congress’s budget scorekeeper said both measures fall short of their savings goals, prompting leaders to rework their proposals.

The VIX reached its highest point of the year, 29.4, on March 16, the week after Japan’s biggest earthquake on record. It fell as much as 50 percent from that peak as the S&P 500 rose to an almost three-year high amid better-than-expected corporate earnings and as the Federal Reserve bought Treasuries to boost economic growth.

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