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 upwardly out of the coin puts relative to calls.  The index moves betwixt 100 in addition to 150, alongside 100 pregnant that traders are non pricing inwards negative tail opportunity in addition to 150 reflects a high grade of negative tail opportunity pricing.  This tin travel viewed every bit a stance index, every bit it reflects the grade to which traders are hedging against marketplace position risk.

Interestingly, we’ve tended to run across depression skew numbers close intermediate term lows inwards SPY in addition to high skew set out close intermediate-term tops.  This is dissimilar from what nosotros run across alongside put/call ratios.  Here nosotros run across a higher grade of tail opportunity hedging next forcefulness rather than weakness, peradventure every bit 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 accept averaged a loss of -.76%.  When skew has been inwards its lowest quartile, the side past times side 10 days inwards SPY accept averaged a make of +1.14%.  The nigh electrical flow skew reading is inwards the lowest quartile.

I volition travel refining this mensurate in addition to looking at a longer history inwards the close future.  It appears to travel a worthwhile complement to other stance measures.

Further Reading:  Equity Put-Call Ratio
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