U.S. Stock Volatility Surges to Six-Week High as Merrill Drops

A gauge of expected stock market swings rose to a six-week high after Merrill Lynch & Co.'s shares plunged on concern the world's biggest brokerage faces $10 billion in new writedowns.

The Chicago Board Options Exchange Volatility Index, or VIX, reached 25 for the first time since Sept. 18, when the Federal Reserve cut its benchmark interest rate by a quarter-point. The index, derived from prices for Standard & Poor's 500 Index options, rose 0.9 percent to 23.01 after earlier reaching 25.17.

``People are more nervous about a correction and are willing to pay more to avoid it,'' said Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options market analytics. ``Bad news could be lurking in the financials.''

The S&P 500 rose 0.1 percent. Financial shares in the index dropped 1.6 percent to their lowest level since June 2006.

November 32.50 calls, the most-active contracts tied to the VIX, added 29 percent to 45 cents and made up a fifth of today's total call volume. Calls give the right to buy a security for a certain amount, the strike price, by a given date. Puts convey the right to sell.

The VIX is known as the stock market's ``fear gauge'' because it tends to rise when stocks are falling. Higher readings indicate traders expect larger share-price swings in the next 30 days.

Merrill declined $4.91, or 7.9 percent, to $57.28, the biggest slide since the Sept. 11, 2001, terrorist attacks.

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