Options Jive - October 8, 2024 - How Useful Is SKEW

This episode explores the usefulness of the skew (SKU) index as a predictor of market movements. Against the backdrop of current market conditions, where the SKU index is at 155, the hosts discuss its implications. More significantly, they analyze data from the past 35 years, categorizing SKU values into quartiles to understand their correlation with subsequent S&P 500 (SPX) and VIX index movements. For instance, they find that while high SKU values often correlate with increased protection buying, the subsequent market movements are not always as dramatic as anticipated. The analysis reveals that the current high SKU level presents a greater risk of downward movement in the SPX rather than upward continuation, with a higher likelihood of increased VIX volatility in the coming month. In contrast to expectations, the data suggests that extreme market movements are more likely to occur during periods of market calm. Ultimately, the hosts conclude that while the SKU index offers interesting insights, its predictive power for future market or VIX movements remains limited, emphasizing the importance of focusing on high volatility and capitalizing on high-VIX environments.