Tags: stock | Skew | Index | volatility

Investor Fear of Stock Plunge Shows in Skew Index of Volatility

By    |   Wednesday, 25 June 2014 11:44 AM

While the Chicago Board Options Exchange Volatility Index (VIX), which measures expectations of volatility for the S&P 500, hit a seven-year low last week, another volatility indicator, the Skew index, tells a different story.

The Skew index, also known as the Black Swan Index, measures the risk of an unexpected event causing high volatility in the S&P 500. And the index has jumped more than 12 percent this month.

"It's just up like a hook for the whole month of June," Catherine Shalen, the CBOE's director of research, tells CNBC.

Editor’s Note:
5 Shocking Reasons the Dow Will Hit 60,000


"What's happening is that in spite of the fact that everybody says the VIX is low and the market is complacent, the market is not complacent in every way. This is telling us that some investors who trade in options believe that the probability for a sharp, 3-standard-deviation move has increased."

Standard deviation is a measure of volatility.

And why are investors getting worried about volatility? "Some people are doubting a little bit [Federal Reserve Chair] Janet Yellen's statement that there was no sign of inflation," Shalen notes.

"They don't think [a Black Swan] can happen with a huge possibility, but they're wondering. That immediately translates into demand for out-of-money puts."

The S&P 500 hasn't endured a 10 percent correction since October 2011, and it stands within 1 percent of its record high, so many investors have dropped their guard.

Investors are being "extremely complacent," Michael O'Rourke, chief market strategist at JonesTrading, tells The Wall Street Journal. "The biggest mistake people make is looking at the current environment and extrapolating that it will continue into the future."

Editor’s Note: 5 Shocking Reasons the Dow Will Hit 60,000

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InvestingAnalysis
While the Chicago Board Options Exchange Volatility Index (VIX), which measures expectations of volatility for the S&P 500, hit a seven-year low last week, another volatility indicator, the Skew index, tells a different story.
stock, Skew, Index, volatility
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2014-44-25
Wednesday, 25 June 2014 11:44 AM
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