SKEW Surge, What Does It Mean?

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CBOE SKEW is the most significant since just before Brexit, clients this weekend we’re talking up this development and its implications.

Volatility

Realized vol 10-11 (cheap)
Out of the Money vol 22-24 (far more expensive)

Skew RichThe Skew index as a measure of the slope of the implied volatility curve is as much a function of low implied volatility as it is a demand for cheap downside hedges given the low absolute premium.  Note from attached chart over the last 15 months, SKEW index spikes (above) have tended to occur at interim market pull backs.

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Reasons for High SKEW today in the Market?

1. Too many market participants don’t trust the rally, want to buy out of the $ downside protection.

2. Too many have missed the rally, doubling down on downside protection.

3. Some are worried about a breakthrough in Washington, a deal on tax reform and health care, buying out of $ upside for a monster breakout.

4. Geopolitical Risk:  North Korea vs Rex Tillerson, U.S. Secretary of State.

Saber rattling this weekend and Friday. Some investors are worried about a US / Japan attack on N Korea.

5. Quarter End (Q1) a week from Friday:  Investors trying to protect gains, they’re buying out of $ downside protection.  U.S. equities are extremely rich to fundamentals, tooooo much riding on perfect Trump policy execution in Washington.

CBOE SKEW Index is a global, strike independent measure of the slope of the implied volatility curve that increases as this curve tends to steepen. The index is calculated from the price of a tradable portfolio of out-of-the money S&P 500 options, similar to the VIX Index.  – Bloomberg

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