SKEW trade ideas
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 CBOE:SKEW 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.
$SKEW CBOE SKEW Index and two recent signalsSKEW is a measure of options prices in the S&P500 Index that divides the options volatilities of puts/calls.
How to use the CBOE:SKEW Index gets a bit more cloudy since it isn't always clear or perfect in its "signal generation". But I think it is important to know what it is showing so you can at least decide what the general sentiment and positioning is in the options market for the S&P500 or $SPY.
So let's talk about a couple of scenarios:
1. Rising CBOE:SKEW and Rising AMEX:SPY prices. The thinking process behind this combination is that people are selling calls and using the proceeds to buy puts to protect against a market drop. This is a market that is "hedging" as the market goes up. So if people are hedging their longs, they are effectively showing that they are worried about falling prices and that implies the market is "climbing a wall of worry." Markets usually continue to climb in that condition. I have labeled this setup in late May which preceded the advance in stock prices in June.
2. Falling CBOE:SKEW and Falling AMEX:SPY prices. The logic behind this setup is that people are buying calls as stock prices fall, getting more emboldened with price declines, which is a very bearish setup implying lower prices ahead. This is the scenario we had going into the end of July which preceded the drop in August.
You can see that CBOE:SKEW has returned to the middle of the range here, so there is no new signal to work from here.
Stay tuned for one of these scenarios to set up again. The next variable to use is the level of TVC:VIX to alert us to whether there is active buying of options or selling of options to give us deeper insights into what is likely to happen.
Cheers,
Tim
10:59AM EST 8/8/2024
Skew IndexThe SKEW index is a measure of potential risk in financial markets. Much like the VIX index, the SKEW index can be a proxy for investor sentiment and volatility. The Skew Index measures perceived tail-risk in the S&P 500.
SKEW values generally range from 100 to 150 where the higher the rating, the higher the perceived tail risk and chance of a black swan event. A SKEW rating of 100 means the perceived distribution of S&P 500 returns is normal and, therefore, the probability of an outlier return is small.
Skew Index is at the lower end of its risk-range. Market doesn't appear to be hedging any tail risk
Extremely low SKEW saying market is bottoming!The SKEW has continued to go down reaching its historical lows of 2019. A low skew has virtually always been fairly strongly correlated with market bottoms. Many times the lows are put in before the SKEW bottoms. Although as it keeps going down the market can as well which has been occurring this year as since May the SKEW was certainly fairly low in the lower range but managed to go lower along with the general markets.
But now with matching the previous extreme low from 2019 the SKEW most likely has bottomed and we could be in for a very unexpected large rally.
SKEW IndexDespite numerous mentions about the CBOE SKEW Index, we are no where near the 2018/2019 lows (which are the lowest readings on file for the past decade).
Understanding how SKEW Index works, it's relationship to Vol Structures, and impact towards Gamma & Vega and how/what it implies by way of Institutional Hedging is another tool for the pros.
Do your DD (due diligence) before reading someone's tweet, getting the reddit cliff notes version, and then deploying your personal capital...the markets are not easy, and complex relationships take time to understand all aspects and angles. MMs want you to believe everything is linear, but they just aren't!
SKEW Indicator and NASDAQ - point of reversal interest?SKEW is probably a little less known in the world of volatility than for example the VIX, but essentially it is a measure of the implied volatility of OUT of the money options, as opposed to AT the money options on the market like the VIX.
I suppose it may be a better comparison to check SKEW vs the SPY, but I'm a NASDAQ guy so I wanted to have a look at this in particular.
Basically the lower the SKEW is, the lower the market's expectation that the market price will move MORE than 2 standard deviations from the current price.
It's difficult to ever draw perfect correlations or conclusions, however, it does seem that once the SKEW "looks like" and this is more of an opinion of how you think the chart of the SKEW looks, but when the SKEW looks like it's made at least an interim bottom and is reversing upwards, this seems to correlate with the market/NASDAQ getting at least an interim reversal. (some instances indicated by the vertical green lines)
Difficult to put into text this kind of idea, but kind of consider, if the SKEW is a measurement of the market's expectation to get a move from current price more than 2 standard deviations in the next month, then once the SKEW "bottoms out", it means that the market isn't really expecting a big move to happen in the next 30 days (this includes bearish and bullish moves btw); but when SKEW looks like it's made an interim bottom, and looks like its starting to creep back upwards, this is the point at which market sentiment is starting to shift slowly, showing as the SKEW moves back up that there is more and more expectation of a move in price more than 2 standard deviations from the current market price.
It's at this point (the point of looking like a reversal off of an interim bottom in the SKEW) that I think could correlate to at least interim bottoms in the market; because we're precisely at the point at which SKEW shows us the market doesn't think we're about to get a big bearish OR bullish movement in price; and the fact we're at the point which it's just starting to creep upward again; shows us that the market is expecting SOME movement in price; but if it were going to be a sharp correction of some kind you would see the SKEW at a much higher level already, not just reversing off of what looks like a bottom.
Again, correlation maybe, opinion maybe, trying to get a sense of how something like the SKEW communicates what the market itself is thinking.
Food for thought.
ICEBURG RIGHT AHEAD!!!Cem Karsan was on a vol podcast recently talking about the past week and what’s to come.
open.spotify.com
Of particular interest for me is the recent distribution of skew term structure into a market selloff.
The amount of skew there is and the amount of term structure is what drives an imbalance in delta effects.
The skew distribution into a decline is a very strong indicator for the next few days or even week.
there's a glitch in the matrixvol skew measures otm premium demand vs atm demand. the scale goes from 100-150. today we saw history as it cracked outside that range due to a major offloading of hedge activity. just saying ive never seen anything like this. i wonder how many funds are short and how desperate they are to duck and cover?
Using the SKEW Moving AverageSKEW index representing the degree of tail risk.
It is calculated by the Chicago Board of Options Exchange (CBOE) in the U.S.
It is an index of market skew.
Tail risk is a risk that has a very low probability of occurring, but if it does occur, a significant decline is expected.
In this section, we will predict the upward and downward direction of the SKEW index based on the 50-day moving average, considering that the SKEW index rises and falls ahead of the stock price decline.
The past 50-day moving average topped on February 24 and September 4.
In the past, the 50-day moving average topped on February 24 and September 4.
Since then, the stock price has started to decline almost in the same way as the SKEW moving average.
We can say that the stock is probably in an upward phase now.
The top of the 50-day moving average suggests that the turning point may be in mid to late January.
For your reference
Skew Vix divergenceLike last year the pro's buying protection while Joe Six Pack is selling vol on his Robin Hood account. You can't time when the real volatility kicks in but the signs are there. Would a Biden win be priced in and what would happen to markets when he wins? I would not be surprised that we would see at least a 50% correction when that happens. Time will tell watch your six and price action or join the pro's and try to get some cheap short exposure till end of year, you gotta be in it to win it. SWAN might be a nice ETF to look at ....
Implied Volatiliy a Risk Pre and Post Earnings AMZN AAPL GOOGLI want to point out two things in this post:
1. The elevated implied volatility before earnings on blue chips stocks is per se a risk factor due to high call open interest and the following reduction in implied volatility post earnings.
2. The SKEW index is signaling increasing tail risk.
The first point:
As I’ve pointed out in recent posts, high open interest has been a tailwind for stocks as market makers are short calls and forced to buy the underlying without any other purpose but to hedge.
Before earnings, implied volatility (IV) on stocks rises significantly.
For out-of-the-money options, the delta rises with higher IV (this makes intuitively sense because higher volatility means a higher probability for the option to get in-the-money).
As IV rises before earnings, the sum of the delta dollars rises. This is forcing market makers to increase their notional hedges, i.e. they need to buy more of the underlying when their net short calls (status quo) in order to stay delta neutral.
Post earnings IV falls .
This is a risk when market makers are long the underlying stocks, and traders long the options.
When IV falls (all else equal) the market makers may sell the underlying stock no matter how good the earnings reports are.
The second point:
The SKEW Index is derived from S&P500 options, and measures tail risk, which is the risk for outlier returns.
When the SKEW is 100, the option market is discounting negligible tail risk.
As the SKEW rises above 100, the tail risk is increasing.
The SKEW is not a timing instrument, but worth watching as it reaches extreme levels (now >140).
In summary:
The large cap stocks have had an amazing outperformance as I’ve highlighted in recent posts. Even though they may beat earnings expectations, the structure of the options market may be a headwind post earnings.
The SKEW is signaling higher tail risk.
Skew you
Skew index has been on the rise. Many refer to it as the "real fear" index, but that is wrong. Rising skew has very little to do with crashing equities. Skew rising is just pointing out the fact downside protection is rising on a relative basis. Given the fact the melt up has been rather brutal, skew "becomes bid automatically" as we "move along the vol curve".
SKEW VIXThe SKEW Index imho is a usefull indicator but the index does not provide you any timing on when to sell or to buy. I always look at divergence and this time the divergence is massive. So the pro's are buying protection (SKEW) while Joe 6 pack keeps buying stocks and is filled with FOMO (VIX)....Why make it difficult for yourself and do as the pro's are doing ...Buy some protection or reduce position size.....
Skew Index. A marker of fear in the markets.When the Skew index rises its an indicator of fear within the stock markets. Usually when the Skew hits $150 or higher investors should be very leary on what is to come. I fear a steep decline is coming very soon. Skew Index is a must in anyones watchlist right next to the VIX. Hope this finds you well.
