The $SKEW tops 150 are you worried?
A higher $SKEW number for the Cboe $SKEW index is usually associated with a level of worry among market players. The larger $SKEW gets the more people want to pay for puts. If one digs into how the $SKEW is made up there is a bit more to it than just expensive puts. It also means cheap calls. The Cboe white paper on skew is here.
Scroll down to page 15 of the white paper, Cboe goes through a real example of the skew calculation. I recommend anyone who trades $VIX to do the same. $Cboe is great at this stuff. $SKEW is 30 day out calls and puts that are out of the money by a designated amount. $SKEW looks at the same thing over and over so the numbers range from 100 to 150 roughly. The chart says 150 is a high number so let’s unpack that a little bit.
Charts by Livevolpro from Cboe
Anyone who spent time in the $SPX pit, like me in mid-90s, remembers the slope of index curves moving around the ATM option. There is a put curve and a call curve and they talk to each other but can swing wildly apart depending on what is going on at any particular time. The way I see $SKEW calculated is that put IV can stay still but if the market crushes the upside call IV, $SKEW can rise. Conversely upside call skew can stay flat and the put curve can rise pushing $SKEW higher. The last spike on Aug 13th was a near term low in SPX where $SKEW shot to 157 in a case where puts went nuts.
Right now 30 day SPX puts at a 15 delta is very solid at 150% of the ATM implied volatility . Most of the $SKEW value is coming from expensive puts and not necessarily cheap upside calls. I think players are backspreading the market, holding long equities and buying some crash protection, in case we actually lift higher if all the geopolitical stuff plays out net positive.
I still think the rally into the year end happens if the Trade Wars end with no one bloody. It appears traders are still hedging that a bit. A trade to sell the skew and get long upside in SPX in the Nov cycle should work well. Check out our Gold Class to learn how to do that since we analyze trades like that on weekly basis.
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