The market will have a new way to gauge fear. CSFB is releasing a new index that will measure fear. According to Barrons:
Barron’s: The markets are warlike, and yet New York is like a small town. How funny that CSFB’s creators, Dennis Davitt and Edward K. Tom — who run Credit Suisse‘s equity-derivatives trading and strategy, respectively — chose the same restaurant. (VIX magnanimously rises to invite his adversaries to dine.)
VIX: We were just discussing the new CSFB. Can you elaborate?
Tom: Our indicator answers a simple question. If an investor will forgo upside returns above 10%, what is the deductible before a Standard & Poor’s 500 portfolio can be fully insured?
VIX: You mean selling an out-of-the-money index call and buying an out-of-the-money put to hedge a stock portfolio?
Davitt: Exactly. VIX wasn’t designed to measure fear. VIX measures 30-day market expectations for volatility, which is associated with, but not always correlated to, fear.
VIX: Say it, Double-D.
Tom: CSFB quantifies fear by measuring “zero-premium collars” that expire in three months, rather than VIX’s 30 days.
Davitt: Here is another major difference. Say there is a massive Standard & Poor’s 500 call bid. That indicates investor confidence, but the bid could cause call implied volatility to increase, making VIX rise, not fall.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.