Thursday, June 4, 2015



Some time ago CSFB has devised a "fear barometer" that shows what entering a zero-cost collar implies in terms of how far out of the money the protection is that can be theoretically bought at no cost by selling a specific call. Essentially this is a variation on the Ansbacher Index, as it compares the premiums paid on calls with those paid on puts – employing solely SPX options.

It works as follows: first it is determined how much one can receive by selling an SPX call expiring in three months time that is 10% out of the money. Then one searches for an SPX put that can be bought with the proceeds, or rather, one calculates how far out of the money this put is based on current premiums, i.e., by what percentage the SPX would have to decline for this put to become an at-the-money put (calculation is required, as neither a call strike that is precisely 10% out of the money nor a put option with an exactly similar price are likely to exist except for brief moments in time). The result is plotted as an index – i.e., the height of the index shows the above mentioned percentage. The higher the index, the more expensive SPX puts are relative to SPX calls. The index thus expresses the urgency with which big traders are seeking out protection against a sizable market decline.

The CSFB fear barometer has been near record highs since mid 2014. Note how low it was at the depths of the 2007-2009 market decline – clearly, this is not a contrary indicator. Big traders are paying up for protection, a sign that they believe the market is very dangerous at current levels.

We are struck though by the persistence with which big traders have paid up for protective puts, and how reluctant option writers are to sell them. 

No comments:

Post a Comment