One of the most complex parts of the market is flashing it’s most dire warning ever, according to Credit Suisse.
The “fear barometer” has peaked at 44.7% according to Credit Suisse derivatives strategy team, the highest since the measures inception in January 2013.
The measure is based on the premium derivatives traders have to pay in order to protect their investments to the downside. Or for the more technically-minded, here’s the explanation from the firm.
“Recall that the CSFB is calculated by selling a 3M 10% out-of-the-money call on the S&P and using the premium to purchase downside protection,” the firm wrote in a note Monday. “The level of the index indicates the %OTM strike of the put that makes the strategy net zero cost.”
For the less technically-minded, here’s how Credit Suisse summarises what the reading means: “Put another way, the derivatives market is assigning less than 1% probability the market will rise by 10% in the next three months vs. 17% probability it will fall by 10%.”
So it’s more expensive than ever to cover yourself against a market contraction, and that’s worrying for investors.