The CBOE SKEW Index (SKEW) topped 142 on each of the first four trading days this week. The long-term daily average for the SKEW Index (since January 1990) is 118.8, but the daily average for the SKEW Index in 2017 (through August 17) is a much higher 134.5. CBOE SKEW Index values, which are calculated from weighted strips of out-of-the-money S&P 500 options, often rise to higher levels as investors become more fearful of a “black swan” event — an unexpected event of large magnitude and consequence, and there is higher demand for out-of-the-money put options on the S&P 500 (SPX) Index that may be used to help protect an equity portfolio in case of a severe stock market correction.
As shown in the table below, all nine of the highest values for the SKEW Index have occurred since mid-2016.
MORE ON THE SKEW INDEX
The value of SKEW increases with the fear of tail risk of S&P 500 returns. If there were no tail risk expectations, SKEW would be equal to 100. The FAQ on the SKEW Index notes that –
“The price of S&P 500 skewness is inconvenient to use directly as an index because it is typically a small negative number, for example -.8, -2.3, or -4.3. SKEW converts this price as follows: SKEW = 100 – 10 * price of skewness. With this definition, a price of -2.1 translates to a SKEW value of 121. S&P 500 options with 30 days to expiration are generally unavailable. SKEW is therefore interpolated from two “SKEW” values at the maturities of nearby and second nearby options with at least 8 days left to expiration.”
To download the SKEW price data history and learn more about the CBOE SKEW Index, please visit www.cboe.com/SKEW.