“$SKEW at current levels not necessarily a bearish sign; rather an indication for lack of bullishness,” Yannis Couletsis, director at volatility hedge fund Credence Capital Management Ltd., said in a tweet.
There’s another reason doom-mongers shouldn’t read too much into it: The gauge hasn’t been particularly good at predicting downdrafts. In the run-up to February’s two-day, 6 percent dive in the S&P 500 for instance, the SKEW was actually falling, suggesting investors were oblivious to risks.
Back then, outsized demand for out-of-the-money call options -- which would have dragged down the SKEW gauge -- could have been the culprit, as analysts priced in the benefits of U.S. tax cuts.
‘Noisy’
Pravit Chintawongvanich, equity derivatives strategist at Wells Fargo Securities, urges caution. The SKEW index is “very, very, noisy,” and can be buffeted by price movements in relatively illiquid options that are well out-of-the-money, he says.
All the same, investors seem focused on the threats to global markets just now. A trade war, quantitative tightening and political populism are among the largest tail risks, according to Bank of America Corp.’s survey of fund managers last month.
“Elevated short interest” in FAANG stocks -- the market’s biggest winners this year -- may also account for surging demand for tail-risk protection, according to DeBusschere.
This article was provided by Bloomberg News.