It's A Skewed, Skewed World

Tyler Durden's picture

From Credit Trader

CBOEs recent introduction of the SKEW Index brings the realities of the options market (and real fear indexes) to retail investor's eyes. With so much attention paid to the VIX (the anachronsitic FEAR index) and especially its dropping over the last few months, investors are led to believe that risk is reducing but lo and behold, as many Pros know, the cost of protecting against a much more serious drop (or tail event) has increased quite notably with out-of-the-money options vols rising notably. The chart below shows this quite clearly as VIX (At-the-money vol) ebbs away (red arrows) as the day-to-day vol of more 'normal' mark-to-market movements is culled thanks to the liquidity fueled effervescence, the rise in out of the money (or crisis/event risk) vol has risen dramatically (white arrows). This can only go on so long as vol arbitrageurs will creep up the moneyness curve (to hedge the tail risk) and eventually impact the ATM. This happened in early 2010 and is happening again currently.

The recent moves in the major credit indices also fits with this world view as any smarter-than-the-average bear capital structure arbitrageur knows that the skew (and specifically the out of the money vol market) has a much better relationship with credit than the near-the-money. One other potential way to think of this (hattip to Artemis recent article on this) is that the skew better represents the real market value of the Bernanke Put (i.e. how much is the market pricing in the never-ending story of a Fed-provided safety net) - perhaps notable that the SKEW began to rise very shortly after Jackson Hole and the QE2 plan came online.

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Trimmed Hedge's picture

Is this a signal to BTFD?


Gold 36000's picture

Wow are you for real?  I'm kinda shy so I have a sack over my head.

Trimmed Hedge's picture

If you're referring to my pic, then yes, that's me as a Halloween kitty last year.

Please take off that silly sack! I feel everyone should post their real photo here, incognito or not. Why not? It's a small enough photo, and a very big world.


Anyway, back to on-topicness....

Mercury's picture

Yeah but on the internet no one knows you'r a dog/god. *woof*

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Taleb has popularized (the not quite original) idea that tail risk is typically underpriced but at what point is tail risk overpriced?  If the black swan is big enough your chances of actually taking delivery on your payoff (from your counterparty) gets smaller.

CBOE description and white paper on SKEW

asdasmos's picture

"I feel everyone should post their real photo here, incognito or not. Why not? It's a small enough photo, and a very big world."


Not if it can be used to find you. I have found a picture of her.

dxj's picture

Buy The F--king Dip (Bitchiz)


Gold 36000's picture

This gave everyone a clue to go long the TVIX.  Now with the skew index that inefficiency may disappear.  The world was so much better when everyone had to do their own calculations.

zaknick's picture

Excellent site and grasp of current events.

Henry Chinaski's picture

if u hav tangibles and skilz, tail event is no biggie

MsCreant's picture

It's A Skewed, Skewed World

Tyler, you need an editor, here I am.


It's A Skrewed, Skrewed World

All fixed.

Mr Lennon Hendrix's picture

Funny, I was thinking skewered myself.

Henry Chinaski's picture

It's a screwed, screwed, screwed, screwed, world.

nudedude's picture

Yawn, buy the dip.

treasurefish's picture

I'm not a PhD economist type, just a little guy.  I just realized something that might be pretty obvious to everyone here. If the Bernank is keeping interest rates at $0, and buying treasury bonds on top of that, then interest rates are effectively negative.  Correct?  Well, I have read that the IRS Act of 1913 was instituted as a ploy first, with the plan to pay the interest of the later FED Act of 23 DEC 1913.  If this is true, then in reality, taxpayers are literally giving money away for free to China, et al.  Are we paying people to buy our debt now?  Is this true?  Why would we do such a thing?!

Monkey Craig's picture

it's called screw the middle class...raw

nufio's picture

i dint get the part where the tax payers are giving free money to china. since china holds a lot of us debt they arent the chinese effectively paying the US to hold the debt?

MsCreant's picture

Ben is printing. To pay them off for keeping quiet about the ponzi scam that the US is, Ben is sharing what he is printing. As long as all those in authority agree to keep quiet about all the various kinds of printing going on, the Ponzi will keep on going on... until it can't. 

The only limits I can see to this are the physical limits of food, energy, or armaments. We are getting ready to come up against some I fear. Prepare accordingly.

treasurefish's picture

With all the news going on lately, I am almost prepared.  I filled up several 5 gallon tanks tanks of gasoline, and went to Sam's Club to stock up on bulk basics:  sugar, cooking oil, beans, rice, flour, honey, emergency radio, good survival knife, and AA lithium batteries.  After a disasterous attempt to buy some OTM calls in coal companies last week, I am losing my shirt fast.  I'm about to cash out and buy some firearms.  Wish I had prepared sooner, but at least I'm taking action now.  Hard to do on a budget though. GL everyone.

Pilot's picture

"The only limits I can see to this are the physical limits of food, energy, or armaments. We are getting ready to come up against some I fear."

That is exactly correct.  Hard limits are in view, although not physical.  If Ben takes the value of the Dollar to zero, as is widely expected here, our carrier groups will not be able to put to sea, and we will not be able to defend ourselves.  That is not going to happen.  They (I hope, anyway, understand that).  Extrapolation of the current trend line is absolutely the best short term forecasting tool.   The hell of it is, that in the long term, it is always wrong.


Contrary opinions invited.  I thoughtfully consider same, and am usually educated by them...



bob_dabolina's picture


Can anyone find the correlation between the nationwide heat map in the link vs. municipalities/states in trouble with debt?

It should be...quite easy to see.

How do the states green/red compensate state workers & how are state entitlements distributed? hmmmmmmmm States with the highest debt levels also have the highest gas prices and I'm sure higher everything else prices. I'd be willing to bet business is fleeing those states and thus...well you get the idea.

Food for thought if you trade in debt relating to states/municipalities.

FOC 1183's picture

a quick glance suggests you're right.  I'm pretty certain a scatter plot of those gas prices vs. CDS of the 17 states which are actively traded would yield a positive (and statistically significant) correlation

bob_dabolina's picture

Shit. lol

I mistakenly deleted a comment and I'm not redoing it.

Ura Bonehead's picture

Here's you answer, Bob (at least as it relates to gas prices).



But, yes, CAL is see businesses flee in boat loads.

themosmitsos's picture

Oustanding CreditTrader. Thx!

gaoptimize's picture

Noticed that we have perhaps less than a week until post numbers go 7 digits.  Peak post, or do we have a 32 bit integer for post index?

mynhair's picture

OMG, Hamy has gained article rights....

chump666's picture

Bernanke is going to destroy valuations on everything if he pumps a QE3,  the market won't price risk on from crack up booms anymore, especially when oil will head over $100, yields will go ballistic and China will go nuclear...

Stocks will sell off : volume increasing means that short positions are gathering.

Safty net is now FUBAR

Pilot's picture

"Stocks will sell off'

Yes they will.  My guess is soon (well, shoot, has it already started?)


chump666's picture

looking at a 20% drop...

topshelfstuff's picture
Bernanke Admits QE Raises Stock Prices, Force Investors Into Other Assets


Weisbrot's picture

its official the US governement is providing coins to Zimbabwe,  this makes the US Dollar as solid as the Zimbabwe dollar!

dxj's picture

"perhap snotable" ... LOL

Seriously, really great post.

kummar's picture

If indeed these are the actors set on setting the world ablaze, they are more than likely the same ones who are involved in Greece, Portugal, Dubai, and elsewhere. Presenting: Moore Capital, Brevan Howard and Paulson & Co... Oh and JP Morgan and, ahem, Goldman Sachs.1971 Toyota Pick-Up Truck AC Compressor