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.