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Goals of the CSFB


Sounds well-constructed, but does it really work?

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 3-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'd 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'd expect to buy a closer-to-the-money put. For example, as of the close on Friday (April 9), CSFB closed at 13.68, which means if you sold a 3-month 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 below 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."
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