The cost of bullish call options is dropping, signaling muted expectations for gains in the stock market over the next three months.
The Credit Suisse Fear Barometer, which measures the cost of bearish put options relative to bullish call options, rose to a fresh record of 44.7% on Friday. The gauge, which goes back to 1994, is calculated by selling a 3-month 10% upside call on the SP 500 and using the proceeds to buy downside protection; the barometer’s level shows how far below the current level of the SP, in percentage terms, an investor has to go to buy a put that makes the strategy’s total cost zero.
Put simply, an investor has to go really far below the current level of the SP 500 to buy a put option that is as cheap as the call option 10% above the current level of the index. The closer a put is to the current level of the SP 500, the higher the price.
A put option grants the right to sell the underlying stock or ETF at a certain price, called the strike, by a specific time. A call confers the right to buy.
Friday’s increase in the Credit Suisse Fear Barometer was entirely driven by lower demand for bullish call options on the SP 500, according to Mandy Xu, equity derivatives strategist at Credit Suisse. Typically, an increase in the index is driven by both higher put demand and lower call demand.
“It’s not so much that people are panicking and buying downside protection, but there’s this extreme pessimism or lack of confidence that the market can go higher from here in the next three months,” said Ms. Xu.
Meanwhile, the stock market’s go-to fear gauge has been languishing. The CBOE Volatility Index, or VIX, added 1.3% to 15.56 on Monday after falling on Friday. The VIX hasn’t closed above its 10-year average of roughly 20 since Feb. 29., and fell to a more-than seven month low of 13.1 on April 1.
To be sure, the VIX measures investors’ expectations for stock swings over the next 30 days, while Credit Suisse’s barometer targets a three-month time period. The divergence between the two illustrates how investors are more worried about the next few months than the next few weeks, as they consider first-quarter earnings and guidance, as well a sluggish global economy and swings in oil prices.