Info!! What Nosotros Tin Larn From Options Skew

Above is a nautical chart of CBOE options skew for the S&P 500 Index from 2014 to the present.  The skew index measures the grade to which index options traders are bidding upwards out of the coin puts relative to calls.  The index moves betwixt 100 as well as 150, amongst 100 pregnant that traders are non pricing inwards negative tail adventure as well as 150 reflects a high grade of negative tail adventure pricing.  This tin hand notice endure viewed equally a consider index, equally it reflects the grade to which traders are hedging against marketplace position risk.

Interestingly, we've tended to run across depression skew numbers nigh intermediate term lows inwards SPY as well as high skew lay out nigh intermediate-term tops.  This is unlike from what nosotros run across amongst put/call ratios.  Here nosotros run across a higher grade of tail adventure hedging next trace rather than weakness, peradventure equally a strategy to lock inwards gains.

I divided the sample into quartiles.  When the skew has been inwards its highest quartile, the side past times side 10 days inwards SPY bring averaged a loss of -.76%.  When skew has been inwards its lowest quartile, the side past times side 10 days inwards SPY bring averaged a make of +1.14%.  The almost electrical flow skew reading is inwards the lowest quartile.

I volition endure refining this mensurate as well as looking at a longer history inwards the nigh future.  It appears to endure a worthwhile complement to other consider measures.

Further Reading:  Equity Put-Call Ratio
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