SCBOE SKEW INDEX
Education
THE SKEWED GAMES. UNDERSTANDING CBOE SKEW INDEX (SKEW)
The CBOE Skew Index (SKEW, or "BLACK SWAN" Index) is a financial metric developed by the Chicago Board Options Exchange (CBOE) to measure the perceived tail risk in the S&P 500 over a 30-day horizon.
Tail risk refers to the probability of extreme market movements, such as significant declines or "black swan" events, which are rare but have severe consequences.
Here's a detailed explanation of its role and implications in financial markets:
Key Features of the SSKEW Index
Range and Interpretation
How It Works
Practical Implications
Portfolio Management
Investors use the SKEW Index as a barometer for hedging costs. High SKEW levels indicate that protecting against tail risks has become more expensive (and probably active).
It also helps traders assess whether market pricing aligns with their own risk expectations.
Historical Context
Historically, spikes in the SKEW Index have preceded major market downturns or volatility events, such as the "Flash Crash" in 2010, Bear market in early 2000s (dot com collapse), WFC in 2007-09, market falls in late 2018 and in 2022.
Complement to VIX
While both indices measure risk, they address different aspects: VIX captures overall market volatility, while SKEW focuses on asymmetry and extreme event probabilities.
Limitations
In summary, the CBOE Skew Index provides valuable insights into market participants' perception of tail risks and their willingness to pay for protection against extreme events. It complements other volatility measures like the VIX and serves as a critical tool for risk management and market analysis.
Tail risk refers to the probability of extreme market movements, such as significant declines or "black swan" events, which are rare but have severe consequences.
Here's a detailed explanation of its role and implications in financial markets:
Key Features of the SSKEW Index
- Measurement of Tail Risk. The SKEW Index quantifies the likelihood of returns that deviate two or more standard deviations from the mean. It focuses on outlier events, unlike the VIX (Volatility Index), which measures implied volatility around at-the-money (ATM) options.
- Implied Volatility Skew. The index is derived from the pricing of out-of-the-money (OTM) S&P 500 options. It reflects the market's demand for protection against downside risks, which leads to higher implied volatility for OTM puts compared to calls.
Range and Interpretation
- The SKEW Index typically ranges from 100 to 150.
- A value near 100 suggests a normal distribution of returns with low perceived tail risk.
- Higher values (e.g., above 130) indicate increased concern about potential extreme negative events, with heightened demand for protective options.
How It Works
- The SKEW Index is calculated using a portfolio of OTM options on the S&P 500. The methodology involves measuring the slope of implied volatility across different strike prices, capturing how much more expensive OTM puts are relative to calls. This steepness reflects market participants' expectations of asymmetric risks, particularly on the downside.
- To make a picture clear, we just simply use 125-Day SMA of SKEW Index. Since multi year high has occurred, market turbulence come as usual.
Practical Implications
- Market Sentiment.
- A rising SKEW Index signals growing fear of extreme downside risks. For example, during periods of economic uncertainty or geopolitical tensions, investors may hedge portfolios more aggressively, driving up the index.
- Conversely, lower readings suggest calm market conditions with balanced expectations for future returns.
Portfolio Management
Investors use the SKEW Index as a barometer for hedging costs. High SKEW levels indicate that protecting against tail risks has become more expensive (and probably active).
It also helps traders assess whether market pricing aligns with their own risk expectations.
Historical Context
Historically, spikes in the SKEW Index have preceded major market downturns or volatility events, such as the "Flash Crash" in 2010, Bear market in early 2000s (dot com collapse), WFC in 2007-09, market falls in late 2018 and in 2022.
Complement to VIX
While both indices measure risk, they address different aspects: VIX captures overall market volatility, while SKEW focuses on asymmetry and extreme event probabilities.
Limitations
In summary, the CBOE Skew Index provides valuable insights into market participants' perception of tail risks and their willingness to pay for protection against extreme events. It complements other volatility measures like the VIX and serves as a critical tool for risk management and market analysis.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.