The incredible $Skew

[xandman]

Please feel free to share prognostications, observations and other knowledge about the SKEW. We seem to be in a new volatility era.

from the CBOE:

SKEW typically ranges from 100 to 150. A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the "skew".

 

[xandman]

While lacking true predictive qualities, readers should be aware that the last major move to the upside by the skew was PRIOR to the downward move in the SPY in September 2014. On a longer timeframe, it is also reminiscent of the 1993-1999 move.

Feel free to share qualitative or quantitative filters to make the Skew a more accurate leading indicator.

 

[cdcaveman]

While lacking true predictive qualities, readers should be aware that the last major move to the upside by the skew was PRIOR to the downward move in the SPY in September 2014. On a longer timeframe, it is also reminiscent of the 1993-1999 move.

Feel free to share qualitative or quantitative filters to make the Skew a more accurate leading indicator.

Market perceived implied distribution.... All hindsight.... What are you trying to figure from this

 

[rmorse]

What that graph will not display are the wide illiquid markets that existed for a few days last week. The more margin calls rolled in the buy puts to close, the harder it was to trade.

 

[cdcaveman]

Are the crazy elevated skew days resultant of margin call liquidation... I say yes

 

[xandman]

Market perceived implied distribution.... All hindsight.... What are you trying to figure from this

Increased hedging activity as represented by Skew levels rather than ATM IV (VIX) alone.

 

[xandman]

I think I understand what you guys are saying.....:

That the initial spike in the Skew does not translate to richer IV pricing at the OTM strikes. It is more likely due to the wide bid/ask spreads or illiquidity at those strikes because of recent events.

This would probably make a reversion to 120 more likely when things calm down.

 

[cdcaveman]

So the bid ask spread has a direct relation to volatility it self... As the rate of change increases the risk increases in the market making function which is translated into a higher premium in spread value