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SKEW

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  #1 (permalink)
 worldwary 
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Does anyone here follow the SKEW index?

This is a volatility index, similar to the VIX, but designed specifically to gauge the likelihood of a large selloff (> 2 standard deviations). As I understand the interpretation of the index, when it is high, traders are more concerned about a large selloff in the near future. When it's low, traders do not anticipate a large selloff.

I don't follow the SKEW closely but noticed that it just hit its low of the year. This surprises me as I would have expected it to rise as the market declined in the face of weak economic data over the past few weeks. Any thoughts on how to interpret what this means?

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 HowardCohodas 
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worldwary View Post
Does anyone here follow the SKEW index?

This is a volatility index, similar to the VIX, but designed specifically to gauge the likelihood of a large selloff (> 2 standard deviations). As I understand the interpretation of the index, when it is high, traders are more concerned about a large selloff in the near future. When it's low, traders do not anticipate a large selloff.

I don't follow the SKEW closely but noticed that it just hit its low of the year. This surprises me as I would have expected it to rise as the market declined in the face of weak economic data over the past few weeks. Any thoughts on how to interpret what this means?



Never looked at it before. I'm not seeing much predictive value. You?

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 worldwary 
Williamsburg, VA
 
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HowardCohodas View Post

Never looked at it before. I'm not seeing much predictive value. You?

The index only been published for a few months so there isn't enough data to tell. The CBOE has issued a paper explaining what the index measures and how to interpret it:

https://www.cboe.com/micro/skew/documents/SKEWFAQ.pdf

According to that document, there is a correlation between the SKEW and the odds of a large selloff. At current levels, there's about a 6% chance of a >2 standard deviation selloff in the next 30 days, which is on the low end. I'm not sure how much stock to put in this and am curious if anyone here knows more about the SKEW than I do.

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 Big Mike 
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CBOE - Micro Site


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The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500® returns. Investors now realize that S&P 500 tail risk - the risk of outlier returns two or more standard deviations below the mean - is significantly greater than under a lognormal distribution.

The CBOE SKEW Index ("SKEW") is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible.

As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the "skew".

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