This Fear Gauge Just Hit an All-Time High

But it's not without skeptics.

What's Driving the Markets?

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.

This 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.

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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.

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