CHICAGO (Reuters) - Credit Suisse has introduced a new gauge, the Credit Suisse Fear Barometer (CSFB), which essentially tracks the willingness of investors to pay up for downside protection with collar trades on Standard & Poor's 500 index .SPX option prices.
The index was launched on Monday.
The CSFB is an indicator specifically designed to measure investor sentiment, and the number represented by the index prices zero-premium collars that expire in three months, Credit Suisse said in a research note issued on Monday.
The collar is implemented by the selling of a three-month, 10 percent out-of-the-money SPX call option and using the proceeds to buy a three-month out-of-the-money SPX put option.
The premium on both sides will be equal, resulting in a term commonly known as a zero cost collar.
The CSFB level represents how far out-of-the-money that SPX put option is, or in insurance terms “it represents the deductible one would have to pay before the put kicks in,” Credit Suisse said.
The index would rise when there is excess investor demand for portfolio insurance or lack of demand for call options.
It differs from the Chicago Board Options Exchange Volatility Index .VIX, or VIX, Wall Street’s favourite barometer of investor fear, in its use of SPX options and data.
The VIX, calculated from S&P 500 option prices, measures the market’s expectation of future volatility over the next 30-day period and often moves inversely to the S&P benchmark.
The VIX is a fear gauge by interpretation, not by definition. “It was designed to quantify the expectations for market volatility -- a property that is associated with, but not always correlated to fear,” the note said.
The CSFB provides investors in a transparent way the longer-term sentiment expressed by the institutions and hedge funds that use derivatives to manage risk.
Unlike the VIX, which can whipsaw from day to day as traders respond to transient market activities, “our fear barometer taps the persistent fear levels expressed by the segment of investors that have long-term investment horizons,” Credit Suisse said.
Reporting by Doris Frankel; Editing by Leslie Adler