INSUBCONTINENT EXCLUSIVE:
The options-based Black Swan index may be signaling surging demand from investors for protection against a stock market crash, but Wall
Street analysts see little reason to panic.
The Cboe Skew Index is near a 14-month high
It tracks the implied volatility of deep out-of-the-money options - that is, contracts that need a large move in the market before they come
into play - on the S-P 500.
On Monday, the Skew Index hit 136.56, its highest since October 2018
It last traded at 134.37.
The gauge is also known as the Black Swan index, a reference to the book "Black Swan" by former options trader
Nassim Nicholas Taleb that looks at the potentially catastrophic effects of unpredictable events.
The index has at least once preceded a
In September 2014, its peak reading came before a 7 per cent drop in the S-P index
However, investors are skeptical about the index's usefulness as a tool that predicts a market crash.
"Yes, options markets are twitchily
expecting the next big crack in US stocks," Nicholas Colas, co-founder of DataTrek, wrote in a note on Wednesday
"But they have been doing that since 2014, and the S-P has almost doubled during that time."
Over the last six years, a period marked by
exceptionally low volatility in US equities, the Skew Index's average reading was just shy of 130, 10 points higher than its average over
the decade before that.
Analysts said the index has limited significance on its own.
"We monitor 60-something volatility strategies for
various hedge funds, individuals, various emerging managers, and there is not one of those strategies that uses it as an indicator," Stuart
Barton, managing partner at New York-based investment adviser Invest in Vol LLC, said.
For trading signals, investors tend to focus on
contracts that are closer to where the market is trading, Barton said.
Analysts may shrug off the elevated level of the Skew Index, but that
isn't to say there is no fear on Wall Street.
Potentially market-moving events on the horizon have prompted investors to seek downside
protection, said Michael Purves, chief executive of Tallbacken Capital Advisors in New York.
Uncertainties linked to central bank policy,
the UK general election and the US-China trade war have boosted demand for protection.
"I would interpret it as a healthy market that's
buying some protection with the market up 25 per cent year to date," Purves said of the climb in the Skew Index
"Vol's cheap, and there's a lot of catalysts."