Black Swan Event and the SKEW Index

The CBOE Skew Index was introduced in 2011 for helping to predict black swan events, it provides a vertical skew of expectations, based on analysis of the volatility of deeply-out-of-the-money S&P 500 index options.

SKEW is another  indicator which measures the extent to which investors expect the distribution of security returns to be non-normal. This means a larger than normal distribution of possible returns in the market based on how money is distributed in options.

How to predict black swan events and the SKEW Index

A reading of 100 indicates an expected normal distribution of S&P 500 returns. The higher the reading, the more severe the negative outliers will be. A reading of 145, and the chances of a black swan event goes up substantially and so do outlier returns.

This indicator is not useful for daytrading, but for longer term swing trading, this indicator confirms that outlier returns are possible when high readings are seen. The SKEW has been issuing a warning of a black swan event and we saw the result last Thursday with the BREXIT vote.

The SKEW is worth keeping an eye on and swing traders should add this indicator to their quiver of arrows to understand trader expectations in the options world.

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