About That CSFB Index

• Posted by Adam Warner
• on July 31st, 2009

 

Just to refresh, here’s what that CSFB Index sets out to do.

Looking for a better metric to gage market fear? Credit Suisse has launched the ‘Credit Suisse Fear Barometer’, which gets around many of the problems associated with the VIX. You can view this index on bloomberg at CSFB . 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.

It does sound well constructed. Problem is that in real life, it doesn’t seem to work as planned. Perhaps this study in the graph up above, by Ryan Renicker of New Edge Group works a bit better? Here’s what he did.

What I do is simply plot  the ratio of a constant maturity 1- month  out-of-money (25 delta) put implied volatility for the SPY  / the 50 delta implied volatility of the SPY to normalize.

Unlike the CSFB, this shows real complacency now. Which kind of makes more sense in that we ARE very complacent now.

Again, getting back to that ZH Theory of manipulated VIX, it just doesn’t make much sense. Now someone COULD bang out options anywhere and on the margins cause actual stock/index volatilty to decline as the new options longs battle themselves to flip stock. But even if you think that happened, the idea he’s floating is that the VIX, the headline volatility gauge, is understating Fear. In reality, it’s fair to high compared to both individual stock volatiltiy and realized volatiltiy in the index itself.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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