Wall Street’s Black Swan Index Doesn’t Fear

Option Genius Podcast – Episode 005 – Who’s Afraid Of The Black Swan

Wall Street’s Black Swan Index Doesn’t Fear

The Options-Based Black Swan Index May Signal Growing Investor Demand For Protection From A Stock Market Crash, But Wall Street Analysts See Little To Panic.

The Cboe Skew Index (SKEWX) is near a 14-month high. It tracks the implied volatility of out-of-money options, that is, contracts that require significant market movement before they come into play on S&P 500.

The Skew Index hit 136.56 on Monday, its highest level since October 2018. Last time it traded at 134.37.

The marker is also known as the index «black swan». This is a reference to the book «Black Swan» (Black Swan) of former options trader Nassim Nicholas Taleb, which looks at the potentially catastrophic consequences of unpredictable events.

The index has already preceded a market sell-off at least once. In September 2014, its peak value was recorded and the subsequent fall in the S index&P by 7%. However, investors are skeptical about the usefulness of the index as a tool that predicts a market crash..

«Yes, options markets are looking forward to the next big gap in US stocks, DataTrek co-founder Nicholas Colas wrote in a note on Wednesday. – But they’ve been doing it since 2014, and S&P almost doubled in that time».

Over the past six years, a period marked by extremely low volatility in US stocks, the Skew Index has averaged just 130, 10 points higher than its average of the decade before..

Analysts say the index is of limited value on its own.

«We monitor volatility strategies dating back more than 60 years for various hedge funds, individuals, various aspiring managers, and none of these strategies use it as an indicator.», – said Stuart Barton, managing partner of New York investment advisor Invest in Vol LLC.

Wall Street's Black Swan Index Doesn't Fear

For trading signals, Barton says, investors tend to focus on contracts that are closer to the area where the market is being traded..

Analysts may shrug off the elevated skew, but that doesn’t mean Wall Street is cloudless..

Potentially moving events on the horizon have prompted investors to seek fall protection, says Michael Purves, CEO of Tallbacken Capital Advisors in New York.

Uncertainties over central bank policies, the UK general election and the U.S.-China trade war have boosted demand for protection.

«I would say that this is a healthy market that buys some kind of protection with the market growing 25% YTD, ”Purves said of the rise in the asymmetry index. – Volatile instruments are cheap and there are many catalysts».