We pointed out the surge in 'fear' among professional US equity investors earlier in the week, to near record highs (hit during the Brexit vote) up 8 days in a row. However, while hedging downside is active, as Credit Suisse notes, it is actually the demise of upside call bets that is the biggest driver...

As Credit Suisse explains...

CS Fear Barometer surged to near a record high yesterday (the all-time high was set just before the “Brexit” referendum last year).

We’ve gotten a lot of questions on what’s driving the sharp increase. Recall the CSFB is a measure of 3M skew in S&P. It is calculated by selling a 10% OTM call on the S&P and using that premium to purchase downside protection. The level of the index indicates the %OTM strike of the put that makes the strategy net zero cost. A high CSFB reading signals high cost of protection relative to upside calls.

If you break down the increase in S&P skew, you can see that while put demand has certainly increased over the past week, the biggest mover actually comes from the call-side (see Exhibit 2).

Falling call skew indicates investors see less potential for market upside going forward, perhaps in recognition of the increased macro and political headwinds.

This is most notable in the short-dated 1M tenor (which captures both French elections + US government funding deadline), where call skew has sharply fallen to a 1-year low (see Exhibit 3).

This marks a complete reversal of the skew dynamic we had been seeing since the US election where strong call demand lifted call-skew to record highs.