Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Microcap & Penny Stocks : Rat dog micro-cap picks... -- Ignore unavailable to you. Want to Upgrade?

To: Rangle who wrote (39751)	4/11/2009 3:01:09 PM
From: Bucky Katt	Read Replies (1) \| Respond to of 48461

A New Way to Quantify Fear > THE SCENE: A midtown Manhattan restaurant. Two old friends meet for lunch to discuss market events. Barron's: It must be hard having your efficacy questioned, especially as you haven't been behaving as expected lately. VIX, the famed volatility index: It isn't easy being the most successful options-sentiment indicator ever created. Barron's: Do you have a perception problem? VIX: I see just fine. Barron's: Then you won't mind getting new competition Monday, when the Credit Suisse Fear Barometer -- the CSFB -- is unveiled. VIX: C'est la guerre. 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. [CBOE] Barron's: But upside and downside risk is elemental. That is why zero-cost collars are always packed with information. So what is CSFB saying, and how do we use it? Tom: Say, for example, the S&P is at 855, and CSFB is at 13.68%. [If SPX changes, that percent changes.] That means if you are long the Standard & Poor's 500, you can initiate a zero-cost collar by selling a July 940 Standard & Poor's call that is 10% out-of-the-money, and buying a July 738 put that is 13.68% out-of-the-money. This implies investors are expressing relatively low levels of downside fear for the next three months. Barron's: OK, but 13.68% still seems random. Tom: Think of 13.68% (or any CSFB level) as an insurance deductible. It is how much the put is out-of-the-money. The market has to drop 13.68% before it kicks in. Barron's: So if CSFB registers a high level like 20%, investors are afraid, and insurance is more expensive. If CSFB is low, insurance is cheap, and investors aren't. Davitt: Right. We backcast CSFB to 1998. It is ranged from an October 2008 low of 10.5% to a March 2007 high of 30%. VIX: Interesting...However, I'm ubiquitous. Davitt: We have desk real estate, too. Enter "CSFB Index Go" on Bloomberg. Barron's: Well, who'd have ever thought there'd be a bull market for fear? online.barrons.com