Chart of the Week: SKEW Index
Good morning everybody. It’s time for our chart of the week. And this week we’re gonna be going a little bit of a different direction. We’re going to be talking about something called the SKEW Index, which is the VIX SKEW Index. SKEW is the symbol. On stockcharts.com, it’s $SKEW.
So you can see the daily version of the SKEW Index in front of you right now.
So a little definition, a little context here. What is the SKEW Index?
SKEW measures tail risk option bets
These are measuring option bets on what’s called tail risk, right? Tail risk, which means the outlier type of reasons for the markets moving in a certain direction. Black swan events. Maybe a surprise Fed rate cut – obviously not going to happen – but some of these bets are being made regardless.
These are very low probability option bets, but still, if they come in, they get a big pay off. It’s almost similar to if you go to the race track and you’re betting the 90:1 shot every single time; eventually, it’s going to come in at some point in time. But you’re going to stack up a lot of losses probably before that 90:1 shot ever comes in.
So let’s take a look at the SKEW as it’s analyzed here in chart formation and see if we can make heads or tails for understanding what it means currently.
People are betting on chaos
We have the SKEW index at about 155. What does that mean? In context, that means there is a large amount of bets being made for a lot of chaos in the markets or maybe a lot of euphoria. So a lot of calls bets being made on the VIX, a lot of puts being bought on equities and indices too.
How do we know that this is the case? Well, a normal level for the SKEW is 100. That’s a normal, average level for SKEW, where you have, basically, homeostasis. You’ve got an even amount of distribution of puts and calls being bought. Something much higher than that reflects that some optimism that some of these out-of-the money calls and puts are going to come to fruition. And in most cases, when the SKEW Index is rising, it simply means that a lot of money is being placed on put options.
So, you can see that right now, we are at a pretty elevated level. The all-time highs up here around the 170 level, which came in in September – pretty high levels.
So why is it that SKEW bets are being made here? Why are people anticipating that the markets are going to drop sharply so some of these SKEW bets pay off?
Well, we do have an election coming up in a couple of weeks – two weeks from yesterday. That is uncertainty right there. And we will have resolution probably around November 5, November 6. But up until then, there’s a lot of anticipation that there’s going to be some chaos. It never really comes to pass.
So let’s take a look at the weekly chart of this SKEW Index and see what I’m going about here.
What happened during this time in 2020
If you got back to the 2020 election period – that’s right here. We had a good sized move in the summertime, just like we had in 2024, came back down and then rose up sharply as the uncertainty unfolded. And then all of a sudden, the results were done and we had a pullback in SKEW and volatility over here. We did have a big rise later in the year. We had a lot of things dealing with COVID – don’t forget 2021. And as that started to settle down, and we realized that it’s getting under control, SKEW bets started to decline.
But we are right back up there again. We’re right back up there near record levels. We did hit a record level a couple of weeks ago on the SKEW. I think that this really shows you the magnitude of such events happening.
market – what does it do? It just deals with it. The market just deals with the SKEW and with these bets over here. Again, these are low probability, potentially high pay off bets. They don’t always come in. They maybe come in at 10-15% of the time, which means that you’re 85 – 90% against you if you’re making these SKEW bets. But there are people out there who do it, and it creates a lot of volatility in the short run in the markets.
So that’s the SKEW bets – we have the weekly chart and the daily chart.
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