NEW YORK, Dec 12 (Reuters) – The options-based Black Swan index may be signaling surging demand from investors for protection against a stock market crash, but Wall Street analysts see little reason to panic.
The Cboe Skew Index .SKEWX is near a 14-month high. It tracks the implied volatility of deep out-of-the-money options – that is, contracts that need a large move in the market before they come into play – on the S&P 500 .SPX.
On Monday, the Skew Index hit 136.56, its highest since October 2018. It last traded at 134.37.
Note: On Friday 13 December 2019 it proceeded to jump 8.92% to 144.51. This sounds bad…. HOWEVER:
The index has at least once preceded a market sell-off. In September 2014, its peak reading came before a 7% drop in the S&P index. However, investors are skeptical about the index’s usefulness as a tool that predicts a market crash.
“Yes, options markets are twitchily expecting the next big crack in U.S. stocks,” Nicholas Colas, co-founder of DataTrek, wrote in a note on Wednesday. “But they have been doing that since 2014, and the S&P has almost doubled during that time.”
Over the last six years, a period marked by exceptionally low volatility in U.S. equities, the Skew Index’s average reading was just shy of 130, 10 points higher than its average over the decade before that. Analysts said the index has limited significance on its own.
“We monitor 60-something volatility strategies for various hedge funds, individuals, various emerging managers, and there is not one of those strategies that uses it as an indicator,” Stuart Barton, managing partner at New York-based investment adviser Invest in Vol LLC, said.
Should probably keep your eye on this chart over the next few weeks….