Theis produced by the Chicago Board Options Exchange (CBOE) and measures traders buying far out-of-the-money (OTM) Puts in the SPX to try to predict outlier moves of 2 and 3 . All traders pay close attention to the but can the SKEW help us find points of for trades?
A graph of the SKEW Index was displayed. When the SKEW is trading on its low end it is believed that there is a low probability of an outlier move and when the SKEW is trading on its high end there is a high probability of an outlier move. A table displayed SKEW readings from 120 to 145 and listed the perceived probabilities of 2 and 3 SD moves. The table showed that as the SKEW Index rises in price, the percentages of a 2 and 3 SD move increases. A SKEW reading at 120 has a 7.7% chance of a 2 SD market move, at 145, the percentages rise to 14.5%.
Tom explained, “If you are presented with a situation in life, business or trading where they present you with an opportunity. Do you take it? Ninety percent of the people do not and run from it because they are consumed with fear, as opposed to being consumed with opportunity. The key to any opportunity is staying small."
Our study was conducted in the SPY (S&P 500 ETF) using data from 2005 to the present. We chose the optioncycle closest to 45 and with a 30 . All trades were if possible. We tested for all environments, filtered for instances when the SKEW was above 125 and above 135.
A table showed that since 2005 the percentage of days that the SKEW index has been above 125 was only 30% of the time and above 135 only 5% of the time. A table of the results was displayed. The table included the, average P/L, average loss and largest loss. The table showed that waiting to sell the SPY 30 Delta Puts when SKEW was above 125 and 135 produced greater profits and win rates. More interestingly it actually lowered our average and largest losses as well. As Tom noted, “Waiting for high SKEW reduced your Standard Deviation of risk”.
For more information on SKEW see:
Options Jive from January 15, 2016:
The Skinny On Options Data Science from January 28, 2016:
Market Measures from June 8, 2016:
Watch this segment of Market Measures withand for the valuable takeaways and the results of our study on using the SKEW Index to find short premium opportunities in OTM options.