Meet the new measure for investor fear: Credit Suisse’s Fear Barometer. Or, CSFB < Index > Go on the Bloomberg.
This is what it looks like. Click to enlarge.
And this is what it means, according to the Daily Options Report.
This index is calculated using three month SPX option prices to answer the following question: “If I sell a 10% out of the money call, what put can I buy with the premium I received?” If investors are very worried about a crash lower, you would expect to be buying a much farther out of the money put in exchange for the call, while if investors are confident in a market rally you would expect to buy a closer to the money put. For example, as of the close on Friday (April 9th), CSFB closed at 13.68, which means if you sold a 3month 10% out of the money call, you could buy a 13.68% out of the money put for zero cost. This index is effectively a ‘tradeable’ approximation of a zero cost collar.
In short, it’s basically a measure of degree to which demand for downside and upside insurance is skewed. If someone wants to pay more for downside protection relative to upside, the CSFB level will be higher — there’s more fear. If CSFB is low, insurance is cheap — there’s less fear.
Credit Suisse have backcast the barometer to 1998 and come up with a range of 10.5 per cent (October 2008) to 30 per cent (in March 2007), according to Barron’s. Maybe we’re missing something but that timing seems a bit questionable. Shouldn’t investors have been rushing to buy downside insurance in October 2008, when markets were crashing post-Lehman bankruptcy?
By contrast, the much-criticised but still standard fear gauge, the Vix, reached a record intraday high in October 2008 of 89.53.
Most confusing.
Related links:
A new way to quantify fear – Barron’s
New indicator we can soon hyper analyse – Daily Options Report
Vix fails to give you a pony - Condor Options