CBOE SKEW Index Flashing A Warning Sign Of A “Black Swan” Type EventJuly 14, 2014
The CBOE has an interesting daily index that tries to measure the risk of a “black swan” or a two-standard deviation from the mean type of event in the next 30 days. From the CBOE website:
“Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. 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.”
The latest reading of the SKEW Index is at 138.74 which according to the CBO puts the probability of a two standard deviation event happening in the next 30 days for the S&P 500 between 11.75%-13.10% (see the table below). The probability of a three standard deviation event is between 2.22%-2.51%. The 25-day moving average is currently at it’s 2nd highest reading off all-time, just barely below the level reached on January 24, 2014.