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Chris DeMuth Jr.
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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Prior to founding Rangeley Capital, Mr. DeMuth spent his career as a securities analyst for several hedge funds and proprietary trading... More
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  • Seeking Truth From Facts – Friday, December 27, 2013 2 comments
    Dec 27, 2013 9:44 AM

    Introduction to CBOE SKEW Index ("SKEW")

    The crash of October 1987 sensitized investors to the potential for stock market crashes and forever changed their view of S&P 500® returns. Investors now realize that S&P 500 tail risk - the risk of outlier returns two or more standard deviations below the mean - is significantly greater than under a lognormal distribution. The CBOE SKEW Index ("SKEW") is an index derived from the price of S&P 500 tail risk. Similar to VIX®, the price of S&P 500 tail risk is calculated from the prices of S&P 500 out-of-the-money options. SKEW typically ranges from 100 to 150. 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. Since an increase in perceived tail risk increases the relative demand for low strike puts, increases in SKEW also correspond to an overall steepening of the curve of implied volatilities, familiar to option traders as the "skew".

    - CBOE

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  • Dr. Kris
    , contributor
    Comments (359) | Send Message
     
    Buying a lot of cheap out of the money SPX options would be a way for someone of means or a hedge fund to actually skew the SKEW, don't you think?
    30 Dec 2013, 02:21 AM Reply Like
  • KJP712
    , contributor
    Comments (458) | Send Message
     
    Have a Happy New Year and a great 2014 !
    31 Dec 2013, 05:09 PM Reply Like
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