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Skew Index Rises Sharply

INDEX:SKEW   CBOE Skew Index
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One of our readers pointed out to us last week that the recent strong rise in the so-called CBOE SKEW index             should also be counted among the various divergences that make the stock market's current advance suspect. Skew measures the perceived tail risk of the market via the pricing of out-of-the-money options. Generally, a rise in skew indicates that 'crash protection' is in demand among institutional investors (institutional/professional investors are the biggest traders in SPX             options). The basic idea is similar to the CSFB 'fear index' or the Ansbacher index (which compares the premiums paid on equidistant calls and puts).

A unusual move in the skew index (which historically oscillates approximately between a value of 100 and 150) is especially interesting when it diverges strongly from the VIX             , which measures at the money and close to the money front month SPX             option premiums.

Basically what a 'low VIX/high skew' combination is saying is: 'the market overall is complacent, but big investors perceive far more tail risk than usually' (it is exactly the other way around when the VIX             is high and SKEW is low). In other words, a surprising increase in realized volatility may not be too far away. Below is a chart showing the current SKEW/VIX combination. http://www.zerohedge.com/news/2013-10-28/spx-options-skew-vs-vix
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