NEW YORK, Oct 15 (Reuters) - Wall Street is forever on the lookout for ever more exotic indicators of impending doom for the stock market, and the latest measure to catch eyeballs is the CBOE Skew index which recently flashed panic signals like never before.
The options-based index tracks the implied volatility of deep out-of-the-money options - that is, options that are not profitable yet - on the S&P 500 to measure the market’s expectations for large declines in the index.
The SKEW index hit an all-time high of 148.92 on Monday, a reading that suggests a higher likelihood of a large decline in the market. So is it time to panic? Probably not.
“This is one of the cases where just looking at the chart of some index can actually give you the entirely wrong conclusion,” said Jared Woodard, equity derivatives strategist at BGC Partners.
People may have been paying increased attention to this index given that the last time it spiked, in September 2014, its peak reading preceded a 7 percent drop in the S&P index before the market bottomed. The index has been running hot of late: There have been 15 readings above 140 in the index’s history since 1990, and 12 of those have been in the last two years.
The index’s changed behavior, coming at a time when investors are on the lookout for signals that could herald the end of the bull market, has grabbed a fair share of interest.
Analysts peg the greater frequency of spikes in the index to the increased cost of hedging, as regulatory changes have driven a number of big banks to cut back on market-making activities and newer dealers demand higher premiums to sell insurance.
As of yet, the index is not one that many traders swear by. Of the 12 readings above 140 in the past two years, on average, four weeks later the S&P 500 was down just 0.64 percent.
A number of much more widely followed indicators of investor anxiety, including traditional measures of skew that look at the difference in demand for put options versus call options, paint a picture of elevated levels of caution but are far from all-time highs.
“If there was any kind of real move that justified this (reading) you should be able to see it in other measures,” Woodard said.
The CBOE Volatility Index, the market’s favored barometer of volatility, is trading below its long-term average of 20, and has been largely trending down after a spike in late-August. On Thursday it was down 4 percent to 17.23.
Open interest in SPX puts conveying the right to sell the index at a set price in the future exceeds calls that provide a comparable option to buy them at a later date by a 1.9-to-1 margin, well off the high of 2.4-to-1 in March this year.
Monday’s spike in the index seemed to have been influenced by the closing of options positions in the October time frame and the opening of new positions in November expiration, said Jason Goepfert of Sundial Capital Research.
Why this particular index spiked to a high on Monday while many other indicators reflected relative calm may be tied to how it is calculated.
Andrew Wilkinson, chief market strategist at Interactive Brokers LLC, said that the indication is that somebody felt that there was a likelihood of a big downside move and paid up for protection, driving the index to a high.
“In the age of social media, one good call for an indicator tends to accumulate a wide following,” Sundial Capital’s Goepfert said.
Reporting by Saqib Iqbal Ahmed; Editing by Dan Grebler