A popular stock-market ‘black swan’ gauge is at a record

A popular options-market gauge of so-called black swan, or difficult to predict, events is drawing the attention of some bears on Wall Street as it trades at record levels.

The CBOE Skew Index SKEW, -0.91% or simply Skew, which measures the relative cost of purchasing out-of-the money put options on the S&P 500 index SPX, -0.20% finished at a record of 153.34 on March 17, and maintained that level on Monday. Put options confer the right, but not necessarily an obligation, to sell an asset at a specific price and time, while calls give the owner the right to buy an underlying asset.

Skew essentially offers a way to gauge relative demand from investors interested in purchasing insurance—or hedging their equity exposures—against a possible downturn in the broader stock market. Put another way, Skew tracks bearish options bets on the S&P compared with bullish wagers of similar duration, and by some interpretations, investors are now aggressively betting that risks are growing.

Stocks have been on a tear in the wake of President Donald Trump’s Nov. 8 election, which invigorated what some described as the market’s animal spirits. Since the election, the S&P 500 has climbed more than 11%, the Dow Jones Industrial Average DJIA, -0.04% has gained 14% and the Nasdaq Composite Index COMP, +0.01% has climbed about 13.6% during the same period.

But over the past several sessions, Skew’s rise has coincided with a decline, if not a stall out, of the S&P 500 and the broader market.

The rise in Skew also comes as Wall Street’s fear gauge, the CBOE Volatility Index VIX, -1.50% has traded well below its historic average of about 20 for a protracted period, implying a market that may not be prepared for a sudden market swing.

Investors faced a veritable gauntlet of potential risks last week, including the Federal Reserve’s decision to lift benchmark interest rates a quarter-point for the first time in 2017, as well as concerns about the outcome of a Dutch election, which could have confirmed the rise of populism in Europe—potentially disruptive to the eurozone and the euro

MarketWatch

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