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Mind The SKEW—-It’s Hazing Wall Street’s Complacency

Summary:
Still, there is one rather more obscure indicator which shows that there is growing concern in one specific corner of the market, namely the CBOE SKEW index. The index is a measure of perceptions regarding tail risk among traders of S&P 500 options (a  detailed explanation can be found here). In brief, when the SKEW index rises above the threshold of 100, this group of traders believes that tail risk is rising. The index reflects the relative demand for low strike puts and readings above 100 indicate that the probability of outlier events is held to be increasing. Since SPX options are primarily a playground of institutional traders this is usually not considered a contrary indicator,

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Still, there is one rather more obscure indicator which shows that there is growing concern in one specific corner of the market, namely the CBOE SKEW index. The index is a measure of perceptions regarding tail risk among traders of S&P 500 options (a  detailed explanation can be found here).

In brief, when the SKEW index rises above the threshold of 100, this group of traders believes that tail risk is rising. The index reflects the relative demand for low strike puts and readings above 100 indicate that the probability of outlier events is held to be increasing. Since SPX options are primarily a playground of institutional traders this is usually not considered a contrary indicator, particularly when high SKEW readings coincide with signs of complacency everywhere else.

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David Stockman
David Alan Stockman (born November 10, 1946) is a former businessman and U.S. politician who served as a Republican U.S. Representative from the state of Michigan (1977–1981) and as the Director of the Office of Management and Budget (1981–1985) under President Ronald Reagan.

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