Implied Volatility (IV) and the VIX can tell us something about market expectations for the SPX, within one standard deviation over the next 30 days. Volatility skew, which is the pricing difference between SPX puts and calls, tells us where the market is pricing risk and about the likelihood of an up or down move, and the recent skew readings told us something very important. An understanding of skew may help your trading.
Skew is the pricing difference between puts and calls. A graph of the Skew index of the SPX (S&P 500 Index) was displayed. The graph compared the frequency to the monthly percentage returns. The Skew helps us see where the market is placing risk. Recently the Skew has been at record levels.
A graph of the SPX Skew Index from 1990 to present was displayed. The graph showed that the index was on 25 year highs. A reading of 140-150 means the probability of a significant downturn is much higher than normal.
A table of the Skew readings over the last 25 years was displayed. The table showed that Wednesday and Thursday of this week the market was in the top 0.1% of all skew readings in the last 25 years. What caused the high skew and the difference between skew and the VIX was explained. What the skew reading tells us was also explained.
A table of the percentages of a 2 and 3 standard deviation move in the markets as predicted by skew was displayed. The table included the skew price levels, the probabilities of a 2 standard deviation move, and the probabilities of a 3 standard deviation market move at each skew level.
Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the takeaways, a better understanding of skew, and what it tells us.
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