By Mark DeCambre at Marketwatch
Blame it on a looming interest rate hike, sluggish global growth or conflict in the Middle East, but investors are girding for the worst!
That is apparently what Ryan Detrick, head strategist at Kimble Charting Solutions, thinks. He points out that unusual options buying on Monday signaled that Wall Street investors are fretting about the possibility that the market could be whacked by a stock-market crisis.
Detrick said that the so-called CBOE SKEW Index—a measure of fear in the market hit an all-time high on Monday. The options contracts are used to make a bet on the direction of the S&P 500 SPX, +0.19% Essentially, the SKEW measures what investors are willing to pay for put options compared with call options on the S&P 500.
A put option confers the right to sell an underlying security, in this case the S&P 500, at predetermined strike price at a predetermined time. Think of it as buying insurance, if you own the underlying asset. And a call option grants the right to buy.
Detrick said on Monday the CBOE SKEW saw demand for buyers of protection spike above levels not seen in more than 20 years.
“That action [in the CBOE SKEW] showed that [investors] are on edge and are worried about some unknown event that could push equity prices lower,” he told MarketWatch.
Here’s a look at Detrick’s chart, which appeared on Kimble Charting Solutions Tuesday, illustrating the spike:
The CBOE SKEW usual trades between 100 and 150. Detrick said that the SKEW spiked back in September 2014 amid fears about Ebola, but its rise on Monday eclipsed its highest levels hit in the 1990s, as the chart shows:
It is important to note that the CBOE SKEW differs from the so-called CBOE Volatility Index VIX, -0.17% —another measure of implied volatility, known as the fear gauge. The Vix stands at 17, well off its high of 52, reached during the Wall Street rout back in August spurred by worries about petering economic growth in China, the world’s second-largest economy.
Detrick said it isn’t all gloom and doom because it is hard to truly gauge what a spike in the SKEW means, the Vix is hovering at relatively low levels. He does, however, offer a chart of past periods in which the SKEW has spiked and how the market has performed afterward:
Ultimately, Detrick said the SKEW may offer little insights into the psyche of traders. But it might be worth paying attention to if things go south fast.
Source: This unusual options trade signals that Wall Street is bracing for a black swan – MarketWatch