SKEW Index

  

Categories: Derivatives

The SKEW index measures what's called "tail risk"...essentially, the chances that something bonkers will happen in the stock market.

In statistical terms, tail risk tracks the likelihood that the market will experience outlier returns two or more standard deviations below the mean. Fundamentally, investors look at the SKEW to gauge the chances that a market crash could happen.

The SKEW index fits into the same family as the VIX index. The VIX measures volatility in the market. SKEW measures the chances for outlier results. The SKEW index is derived from prices of out-of-the-money options for the S&P 500. Thus, its main ingredient is market sentiment. It quantifies a kind of spidey sense that something strange is about to happen, as evidenced by unusual pricing for options with strike prices that are out-of-the-money.

A measure of 100 for the SKEW means there is very little chance that something weird will happen. As the index rises above 100, the chances for sudden moves become more likely.

Related or Semi-related Video

Finance: What Is a Call Option?25 Views

00:00

finance a la shmoop. what is a call option? option? option, where are you? okay

00:09

yeah yeah. not phone options, call options. and a close but no cigar. a call option [man smokes in a tub of cash]

00:14

is the right to call or buy a security. the concept is easy the math is hard.

00:24

you think Coca Cola's poised for a breakout as they go into the new low

00:30

calorie beverage business. their stock is at 50 bucks a share and you can buy a [man stands on a stage as crowd cheers]

00:35

call option for $1. well that call option buys you the right

00:39

to then buy coke stock at 55 bucks a share anytime you want in the next

00:44

hundred and 20 days. so let's say Coke announces its new sugarless drink flavor

00:48

zero it's two weeks later and the stock skyrockets to fifty eight dollars a

00:53

share. you've already paid the dollar for the option now you have to exercise it. [man lifts weights]

00:59

so you buy the stock and you're all in now for fifty five dollars plus one or

01:04

fifty six bucks a share and your total value is now fifty eight bucks. well you

01:10

could turn around today and sell the bundle that moment, and you'll have

01:13

turned your dollar into two dollars of profit really fast. and obviously had the [equation on screen]

01:18

stock not skyrocketed so quickly well you would have lost everything. still you

01:23

lucked out and now you're sitting on some serious cash, courtesy of your call [two men in a tub of cash]

01:27

options. as for Coke flavor zero turned out to be nothing more than canned water.

Up Next

Finance: What is a Derivative?
23 Views

A derivative of a security is a "something" which derives its value based on the performance of that security... either a put option or a call option.

Finance: What Is a Put Option?
83 Views

What is a put option? A put option is a type of contract that lets the investor sell shares of a stock at a certain price and within a window of ti...

Find other enlightening terms in Shmoop Finance Genius Bar(f)