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The Fear Barometer

With such few signs of pessimism in the media, I thought I might be the wet blanket for the day.  One interesting market sentiment measure is the Credit Suisse Fear Barometer.  The Fear Barometer is a way to measure skew in a consistent format through the pricing of a “zero-cost collar”.  The index assumes that you sell a 3-month, 10% out of the money call and use the proceeds to purchase a 3-month out of the money put.  The moneyness of the put option that you can afford is the index itself, so if the index is at 25 it implies that you can purchase a 3-month put 25% out of the money with the premium that you received from selling the 10% OTM 3 month call.

Since index inception in November of 1994, this average level has been 16.3%.  With the market turbulence of the last five years, the average has been closer to 19%.  The interesting fact is that since January of this year, the index has primarily been above 25%, a level that it was at during only a few times in its 15+ year history.  One of the most notable peaks of similar stratospheric levels – April 2007, a time that would have presented an excellent opportunity to exit the market.

The Fear Barometer would be telling us that the market is “well valued”

Of course there is no one perfect predictor of market tops and bottoms, but I will say that this peak stands out and should be noted.  It certainly does not give me a comfortable backdrop for being overly bullish.

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9 Responses

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  1. Jon Brager says

    This thing doesn’t say much IMO. It’s actually highly correlated with the S&P, which to me means as stocks go higher people are more willing to hedge their gains.

  2. Jason says

    Bloomberg! I can’t live without it!

  3. Wang Yuanhang says

    indication of risk premium?

  4. SurlyTrader says

    That is exactly what we are looking for, the willingness of investors to put their money into hedges rather than participate in future upside gains.

  5. SurlyTrader says

    There is definitely an idea that those who sell puts should get an extra risk premium for selling tail side risk. That being said, I have stated that there would have to be a lot of 1987 events to make the put premium make sense.

Continuing the Discussion

  1. FT Alphaville » Further reading linked to this post on April 6, 2011

    […] The fear barometer is back at 2007 […]

  2. Three Levels to Keep an Eye On | SurlyTrader linked to this post on May 3, 2011

    […] on April 29th, but we have seen a fairly strong rebound in the VIX since its low.  In addition, the Credit Suisse Fear Barometer has remained in ultra-high +25 territory since the beginning of the […]

  3. Fear Barometer Bubbling | SurlyTrader linked to this post on April 18, 2012

    […] talked about this index in April 2011 and I am mentioning it again in April 2012.  “It certainly does not give me a comfortable […]

  4. Is Skew Signalling a Pullback? | Fifth Estate linked to this post on February 20, 2013

    […] are some indicators that I tend to like.  The CSFB “Fear Barometer” is one of them.  As a rehash of what this indicator […]

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