Tuesday, April 14, 2009

New Indicator Trumps the VIX?

I haven't paid much attention to the VIX since the blow-ups of September, let's see how this works.
From Minyanville:
Better mousetrap, anyone? Credit Suisse has launched the "Credit Suisse Fear Barometer," which gets around many of the problems associated with the VIX.

The index is calculated using 3-monthSPX 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.It's essentially a measure of skew, and the degree to which that skew biases to the downside. In theory, the more someone wants to pay for downside relative to upside, the more fear. And that's something to fade....MORE