SKEW is the ticker symbol for the Cboe SKEW Index, also known as the S&P 500 SKEW Index. It is similar to the Cboe Volatility (VIX) Index, but it measures different elements of risk.
The SKEW Index estimates the skewness of S&P 500 returns at the end of a 30-day horizon.
It measures the slope of implied volatility, which can be expressed as the probability of the S&P 500 making a two or even three standard deviation move over the next thirty days. It is calculated using the prices of S&P 500 out-of-the-money (OTM) options.
The SKEW Index is typically viewed as a barometer of “perceived tail risk” in the stock market. Tail-risk in the stock market refers to a change in the price of the S&P 500 or a stock that would put it on the far edges (tails) of the normal statistical distribution curve, such as black swan events and market crashes.
How to use the SKEW Index?
The SKEW value, which typically ranges from 100 to 150, is a measure of the level of risk in the stock market.
A low value, typically between 100 and 120, indicates a relatively calm risk environment. Conversely, a high value, typically above 130, suggests that expectations for a significant market movement are increasing or have reached a peak.
The table below illustrates the estimated risk-adjusted probabilities of two and three-standard deviation moves below the mean for the S&P 500 over the next 30 days, based on the SKEW index value.
For example, when the SKEW index is at 125, there is an estimated 9.05% chance of the S&P 500 experiencing a two-standard deviation move in the next 30 days, and a 1.63% chance of a three-standard deviation move.
Std. Dev. = Standard Deviation
| SKEW Index | 2 Std. Dev. Move | 3 Std. Dev. Move |
|---|---|---|
| 145 | 14.45% | 2.81% |
| 140 | 13.10% | 2.51% |
| 135 | 11.75% | 2.22% |
| 130 | 10.40% | 1.92% |
| 125 | 9.05% | 1.63% |
| 120 | 7.70% | 1.33% |
| 115 | 6.35% | 1.04% |
| 110 | 5.00% | 0.74% |
| 105 | 3.65% | 0.45% |
| 100 | 2.30% | 0.15% |
Can you trade the SKEW?
The SKEW Index is a financial indicator, not a tradable asset, so it cannot be traded directly. However, there are several ways to gain exposure to the index and trade based on its movements.
- Options trading: One way to trade the SKEW Index is through options trading. Investors can buy or sell options on the S&P 500 index, which are influenced by the SKEW Index. By analyzing the SKEW Index, investors can make informed decisions about buying or selling options on the S&P 500.
- Futures contracts: The Chicago Board Options Exchange (CBOE) offers futures contracts on the SKEW index, which allow traders to speculate on the future level of the index.
The ticker symbol for the SKEW futures contract is SKEW.
SKEW futures contracts are cash-settled, which means that at expiration, the holder of the contract will receive cash based on the settlement price of the SKEW index.
It is important to note that these methods are not without risk and it’s crucial to have a good understanding of the underlying mechanics of these products and the market conditions before engaging in any trades. It’s also important to be aware of the associated fees and charges, as well as the tax implications of any trades.