Is The Skew Index ($SKEW) A Market Predictor?

By Lawrence G. McMillan

We always publish a table of the skew in $OEX options (page 9 in this issue), as a sample of how the major index options are skewed.  We also talk about skew in relation to individual stocks and for particular strategies (horizontal skews for calendar spreads, or vertical skews for ratio spreads, for example).  

There are skew indices that others publish.  For example, the CBOE publishes the CBOE Skew Index (symbol: $SKEW).  Also, in Barron’s Magazine each week, on the page where the Striking Price column is printed, next to our Equity-only Put-Call Ratio chart, there are two skew charts – $SPX and $NDX – published by Credit Suisse.   Are these broad-based skew charts useful for market prediction?

Part of the reason that this is a topic of interest is that I have recently seen two separate references to the $SKEW index as a potential predictor of market trouble...

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