Wall Street's options fear gauge spikes up on economy

By Doris Frankel

CHICAGO (Reuters) - The Chicago Board Options Exchange Volatility Index .VIX, Wall Street's barometer of investor fear, spiked higher on Monday reflecting the persistent weakness in the financial sector.

Concerns about a dismal fourth-quarter earnings, massive credit losses at Citigroup Inc (C.N), dismal economic data and worries about the overall U.S. economy in the grip of a one- year recession contributed to the general sense of investor anxiety and sent risk perceptions higher.

The so-called VIX rose 7.05 percent to 45.84, its highest closing since December 18.

"People are coming around to the fact that neither corporate America nor the financial system has been mended. Financials once again look weak and implied volatility reflected by the VIX rose as investors reach for options premium to protect their portfolios," said Andrew Wilkinson, senior market analyst at Interactive Brokers Group in Greenwich, Connecticut.

The VIX, which measures near-term anticipated stock market volatility priced into Standard & Poor's 500 index .SPX options, typically moves up when stocks fall as investors seek portfolio insurance in the form of index options.

The rise in the VIX comes after Friday's somber December U.S. payrolls report, which showed more than half a million jobs lost and the highest unemployment rate since 1993.

"Any thought that there was a lot of cash that would come into the market at the beginning of the year has now been dissipated," said Michael McCarty, chief equity and options strategist at broker-dealer Meridian Equity Partners in New York.

"As a result, we are now back to focusing on dismal economic data and the prospects for earnings disappointments on the horizon," he said.