This episode explores the relationship between the CBOE's skew (SKU) index, market volatility, and the likelihood of significant market downturns. Against the backdrop of a volatile market day, the hosts discuss recent market performance, noting declines in major indices and individual stocks like Apple and Microsoft. More significantly, the conversation pivots to a recent study analyzing the SKU index and its correlation with outlier market events over the past 13 years. For instance, the analysis reveals that while a high SKU value might suggest increased market protection buying, large downside moves historically occurred when the SKU was significantly lower (around 130), not at its current high of 162.78. This suggests that extremely large market drops are more frequent than statistically predicted, particularly those exceeding three times the expected move. In conclusion, the high current SKU value doesn't necessarily predict an imminent crash; rather, the study highlights that major market downturns often occur unexpectedly when market participants are less prepared.
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