Fear or no fear - hard to say based on skew

There is a strong desire to find a new measures of market fear in order to prepare for the next market downturn. The VIX index has been the fear measure of choice as a measure of volatility, but a better measure may through a measure of skew. The CSFB fear index prices out a zero-cost collar between a three month SPX call at 10% out of the money and a put that could be bought the proceeds from selling the call. The proceeds for the fixed call sale are used to buy an out of the money put. If there is more premium from the call, the value of the fear index is the amount of out of the moneyness of the put. A higher level is more likely associated with market extremes. We are at those levels albeit no where near the index levels set pre-financial crisis.

This is a variation on the risk reversal theme of fear indicators. This may be a good adjunct to VIX index and with fixed income indicators like the OIS or TED spreads. The OIS and TED spreads have both been moving up since the beginning of the year.