We outlined our views on volatility recently. Yes, we think VIX and other equity vol is relatively cheap at these levels, but we have to comment shortly on various “news” people are pointing at today, namely that the SKEW index has spiked recently.
Yes, the SKEW index has spiked, but there is no correlation between high/spiking SKEW index and collapsing markets. This is the problem with people writing about markets that don’t understand volatility, nor have they ever traded professionally.
I will leave in depth discussions about volatility and skew for another post, but would like to share the below charts of SPX index (orange) and SKEW index (white).
Since 2013 there is practically not one single sell off in the SPX that was indicated by a spike in the SKEW index. SKEW index doesn’t predict tail risks!
Interestingly enough the SKEW index was at multi year lows just prior to the market collapse in 2008.
Source: charts by Bloomberg