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Options Market "Crash" Indicator Hits Peak Panic, Surpasses Record Highs

Tyler Durden's picture




 

Since we first exposed (and explained) the Black-sh Swan-link nature of the options market's Skew Index, the mainstream media has lept to various conclusions (from ignore it, like everything else, to 'wow'). However, what is crucial to comprehend is that the soaring Skew is occurring at the same time as a collapsing VIX.

And stunningly, what we have seen over the last two days is somewhat unprecedented - VIX has continued to collapse into option expiration (and we know the pattern that occurs after opex) 

 

 

...as SKEW has soared to new all-time record highs.

As a reminder, Skew measures the perceived tail risk of the market via the pricing of out-of-the-money options

 

Generally, a rise in skew indicates that 'crash protection' is in demand among institutional investors (institutional/professional investors are the biggest traders in SPX options).

What this looks like to us is a managed collapse of VIX (that is at-the-money-ish options volatility) which signals to the mainstream that all is well and is levered to drive stocks higher into option expiration (as we have seen above 8 times in a row) while at the same time buying deep-out-of-the-money options to maintain a hedge (of extreme moves).

In other words, professionals have rotated from 'normal' risk protection to 'extreme' risk protection at the largest pace on record all the while fooling the mainstream investor who sees a declining VIX and continues to pick up pennies in front of the steamroller.

As we explained previously,

An
unusual move in the skew index (which historically oscillates
approximately between a value of 100 and 150) is especially interesting
when it diverges strongly from the VIX
, which measures at the money and close to the money front month SPX option premiums.

 

 

Basically what a 'low VIX/high skew' combination is saying is: 'the market overall is complacent, but big investors perceive far more tail risk than usually' (it is exactly the other way around when the VIX is high and SKEW is low).

In other words, a surprising increase in realized volatility may not be too far away... and with OpEx looming, we suspect today or Monday will be the day.

 

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Fri, 10/16/2015 - 09:46 | 6674820 Oldballplayer
Oldballplayer's picture

Well if everyone thinks it will, it probably won't.

 

 

Fri, 10/16/2015 - 09:49 | 6674832 TeamDepends
TeamDepends's picture

The barley harvest came in later than expected, so the Shemita has been delayed a month. That is all.

Fri, 10/16/2015 - 09:50 | 6674839 Chief Kessler
Chief Kessler's picture

Where be Ted Nugget? Prolly shemitaing his pants again?

Fri, 10/16/2015 - 10:09 | 6674906 Oldballplayer
Oldballplayer's picture

Shemita....The Y2k of prophecy.

[I should be careful about making jokes about my hebrew friends.  They might decide my hometown is the next Sodom.  My wife would not look good as a pillar of salt.]

Fri, 10/16/2015 - 09:51 | 6674842 Chief Kessler
Chief Kessler's picture

Brilliant Ted Nugget supporter!

Fri, 10/16/2015 - 09:52 | 6674849 huggy_in_london
huggy_in_london's picture

Completely agree.  You buy skew when it's cheap, never when it's expensive, and if you own it at the wrong levels its gets very painful, very quickly.  

Fri, 10/16/2015 - 10:43 | 6675053 venturen
venturen's picture

WHY DOES ANYONE BLIEVE ANY NUMBER FROM THESE CRIMINALS?

Fri, 10/16/2015 - 09:48 | 6674830 Hype Alert
Hype Alert's picture

It just needs to be doubly FED adjusted.

Fri, 10/16/2015 - 10:02 | 6674882 o r c k
o r c k's picture

FED beef SKEW ?

Fri, 10/16/2015 - 09:49 | 6674838 buzzsaw99
buzzsaw99's picture

i plan to make the same comment on every post today: it won't make any difference [/newt]

Fri, 10/16/2015 - 09:52 | 6674847 Ban KKiller
Ban KKiller's picture

"Look at those counters go!"

Fri, 10/16/2015 - 10:08 | 6674900 buzzsaw99
buzzsaw99's picture

Maybe we got 'em demoralized. [/hudson]

Fri, 10/16/2015 - 12:15 | 6675412 A is A
A is A's picture

They're coming outta the goddamn walls!!! - Hudson

Fri, 10/16/2015 - 09:51 | 6674845 ghostzapper
ghostzapper's picture

Juuuuuuuussssssstttttttttttt about got enough "please fleece me" muppets leaning far enough to one side before the whiplash.  

Fri, 10/16/2015 - 09:55 | 6674854 yogibear
yogibear's picture

Notice overnight futures are stick-saved?

Like magic. 

Just like the Fed is also pulling the levers on mortgages and housing. 

Fed's swap-lines have been busy.

So many plates spinning. We will see what plate falls first.

The derivative market is huge. If an overseas big-money interest jusr nudges that huge derivative pate and it goes crashing... oh well.

Has to be much larger than the central banks can handle.

 

Fri, 10/16/2015 - 09:55 | 6674855 two hoots
two hoots's picture

Markets are becoming compartmentalized as is the economy. 

Fri, 10/16/2015 - 12:39 | 6675516 Baa baa
Baa baa's picture

Yeah sure, just like coveys of quail.

Fri, 10/16/2015 - 09:56 | 6674859 Dr. Engali
Dr. Engali's picture

So. this is bullish right?

Fri, 10/16/2015 - 09:56 | 6674862 Dazman
Dazman's picture

Perhaps SKEW is just being.... SKREWED by the banker elite to throw us all off.

BTMFD you MF

Fri, 10/16/2015 - 09:57 | 6674865 RawPawg
RawPawg's picture

"we suspect today or Monday will be the day"

as in The Crash We have all been talking about?

somebody help me out here...very confused

thanks

Fri, 10/16/2015 - 10:55 | 6675086 Bernoulli
Bernoulli's picture

If you are confused, you should be buying stocks (says Gartman).

As for "The Crash": IMO there will be no more actual crash next time. I don't mean no more crash as in "the markets will always go up and never down again substantially". But as in "if this CS-DB-JPM-GS-BoAML-derivatives-sucker finally goes down, the thing that we call 'markets' nowadays just wont exist anymore".

It's impossible! Face it: Nothing and nobody will re-open. Anybody with financial assets will be stripped of them in a gigantic bail in. And anybody short anything will not be able to pick up their profits because no system or "trading platform" will function. My guess is it will be all masked by the whole internet being down (of course this would need some collaboration of NSA, Google, Facebook, Amazon, and some others).

Fri, 10/16/2015 - 11:12 | 6675145 RawPawg
RawPawg's picture

Thanks for providing me with some clarity...never been in the market..i'm just here trying to figure out when i can start living life simple...again.

Fri, 10/16/2015 - 12:59 | 6675603 cro_maat
cro_maat's picture

You can live simple now. Just ignore the fascist noise around you.

Fri, 10/16/2015 - 09:59 | 6674871 diamond dog
diamond dog's picture

I wonder what Gartman thinks about the VIX/Skew ratio and how it may affect his bullish tankers trade....

Fri, 10/16/2015 - 12:38 | 6675511 Baa baa
Baa baa's picture

He thinks it is in reference to barbecue tools and recipes. He got the tool part right anyway.

Fri, 10/16/2015 - 10:00 | 6674873 taopraxis
taopraxis's picture

Contrarian indicators always fail in extreme situations. Everyone was bearish on the Titanic after it hit that iceberg and sank. Nevertheless, it failed to rally.

Fri, 10/16/2015 - 10:25 | 6674969 _ConanTheLibert...
_ConanTheLibertarian_'s picture

It raced to the bottom.

Fri, 10/16/2015 - 12:09 | 6675390 xrxs
xrxs's picture

Too soon?

Fri, 10/16/2015 - 10:00 | 6674875 Keltner Channel Surf
Keltner Channel Surf's picture

We talk differently here in Ohio, I've always pronounced it "SCREW"

Fri, 10/16/2015 - 10:08 | 6674897 NRGTDR
NRGTDR's picture

Hence the rally to defend 17,000. Another worthless attempt to make money on puts in my book.

Fri, 10/16/2015 - 10:09 | 6674904 CHoward
CHoward's picture

Today is Friday (trash day) and they actually picked my trash up today!  Maybe today is the day markets go to hell or...maybe it might snow.  Who knows. 

Fri, 10/16/2015 - 10:15 | 6674921 hawaiianPunch
hawaiianPunch's picture

Press Your Luck, "Big Bucks, No Whammies" ... unless you're Michael Larson, whammies are just a matter of time.

Fri, 10/16/2015 - 10:17 | 6674932 Tyrone Shoelaces
Tyrone Shoelaces's picture

It's different this time.

Right?

 

Fri, 10/16/2015 - 10:33 | 6675006 Turin Turambar
Turin Turambar's picture

If I'm a contrarian indicator then the crash will be Monday because right now, I'm expecting a green close today for the traditional OPEX screw, and then Monday will be another 200+ up on it's way towards a new all-time high in the next 2-3 weeks.  After that, who knows?  However, when fiat can be created in an infinite amount, there's no reason the Fed and cb's can't buy EVERYTHING.  Why not?  That's the end-game - own as much as possible.  Why wait?  Print away, and buy it all now.

Fri, 10/16/2015 - 12:34 | 6675498 Baa baa
Baa baa's picture

It looks like Japan has already proven it does little good to hold all the toys and no liquid assets.

In an odd way I admire the Japanese soldiering forward into the fog.

Fri, 10/16/2015 - 10:43 | 6675052 venturen
venturen's picture

let me guess...the VIX is rigged? Like Gold, stocks, bonds, curreincies, IPO, inflation, or anything the mega banks and FED touch

Fri, 10/16/2015 - 11:13 | 6675073 benbushiii
benbushiii's picture

The game is all about volatility.  The Banks and the Fed create controlled panics, both buy and sell; expanding and collapsing volatility.  Selling vol when they want it to collapse and buying vol when they want to create fear.  More $s are made in the derivative / volatility plays than by getting the direction correct.  The clearing firms know which stocks are the most heavily shorted and squeeze them, collapsing vol.  When vol gets cheap, the Fed / Banks (they are essentially the same) collude on direction.  Remember how LIBOR was rigged; that was a huge cash cow to the banks.  Now Vol is rigged to create profits.  Once the positions are in place the HFT / Algos take over and create wash trades in the direction of profitability.

Fri, 10/16/2015 - 10:51 | 6675075 Lucky Leprachaun
Lucky Leprachaun's picture

The "professionals" referred to have been feeding crap data for God knows how long.

Fri, 10/16/2015 - 10:59 | 6675102 Osmium
Osmium's picture

"Tail risk"?

The only tail risk that exists is shorts getting their ass pounded by the FED.

Fri, 10/16/2015 - 11:58 | 6675335 nscholten
nscholten's picture

Timely... Couldn't of had this article two weeks ago.

Fri, 10/16/2015 - 12:17 | 6675419 AbbeBrel
AbbeBrel's picture

Cool!! $SKEW at 151 is HIGHER than the last TWENTY years!!

146 in 1999
142 in 2006

it did hit a series of 140+ values in 2104/early 2015. (see Stockcharts).

In summary, the Tail (risk) is wagging the Dog (Fed / Street).

"A SKEW value of 100 means that the perceived distribution of S&P 500 log-returns is normal, and the probability of outlier returns is therefore negligible. As SKEW rises above 100, the left tail of the S&P 500 distribution acquires more weight, and the probabilities of outlier returns become more significant. One can estimate these probabilities from the value of SKEW. "

http://www.cboe.com/micro/skew/introduction.aspx

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