This Fear Gauge Just Hit an All-Time High

But it’s not without skeptics.

Luke Kawa – Julie Verhage | April 11, 2016

While the Chicago Board Options Exchange Volatility Index (VIX) has continued moving lower following its February surge, suggesting that some calm has returned to the markets, Credit Suisse Group AG’s Fear Barometer just hit a new high.

The index, which measures the opportunity cost of buying protection against a decline in stocks, usually sees increases like this due to higher demand for “puts,” or options which give investors the right to sell equities, and lower demand for “calls,” which give the right to buy. Specifically, the barometer calculates how far “out of the money” an investor would have to go to purchase a three-month put on the S&P 500 that is the same price as a 10-percent out of the money three-month call option.

This time, however, the firm says the entire move was driven by lower demand for calls.

00000This means that people are putting a much higher probability on stocks falling rather than rising. “The derivatives market is assigning less than 1 percent probability the market will rise by 10 percent in the next three months vs. 17 percent probability it will fall by 10 percent,” wrote Credit Suisse’s Mandy Xu.

As a measure of market fear, however, Credit Suisse’s measure is not without its skeptics.

“When volatility gets very low, a lot of times, that 10 percent out of the money call gets to be worth almost nothing,” said Pravit Chintawongvanich, equity derivatives strategist at Macro Risk Advisors. “Meanwhile, the puts remain well bid so you have to go really, really far out of the money to find a put that costs the same.”

The high level of this so-called alternative fear index may therefore be more a function of a dearth of optimism in the form of inexpensive call options, than an abundance of fear.

Historically, if you look at when upside calls have been cheap, generally the market is right,” said the strategist. “It is very tough to rally 10 percent in three months when you are already back near all-time highs.

These articles are provided for informational purposes only and were obtained from publicity available sources on the Internet. These articles do not constitute financial advise or trading recommendations by Global Asset Management ("Global"). Global neither warrants the accuracy or completeness of the information contained in these articles, undertakes to update them, nor is it responsible for any omission or error contained in these articles. Viewers are encouraged to conduct, and should only rely on, their own independent research.
The purchase or sale of precious metals involves substantial risk and volatility. If you are contemplating purchasing and/or selling precious metals, you should consult with an independent financial advisor to learn about the inherent risks. Global does not render, and nothing in this website should be construed as, financial advise, a trading recommendations or a solicitation for the purchase or sale of precious metals.

Daily Chart : Gold

Daily Chart : Silver

Daily Chart : Platinum

Daily Chart : Palladium


Copyright © 1996-2015 Global Asset Management. All rights reserved.

2425 Hollywood Blvd. Suite 100. Hollywood, Florida 33020 :: info@globalam.net

Phone: 954.921.1021 :: Fax: 954.921.1536 :: Toll Free: 1.888.421.1021