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Trouble In Paradise

A chart is considered good when you do not have to add any commentary to make a point. The following is one such candidate.

Below is a chart of the spread between the volatility skew and the vix compared to the SPX. For those new to skew it simply measures the distribution of option implied volatility. When speculators price in tail events they buy out of the money options which "skews" or shifts the distribution of volatility from a normal bell curve.

To oversimplify skew one could argue it is an early warning system that tail events are being priced which likely will lead to a jump in volatility as measured by the vix. On Monday the skew did something pretty interesting while the vix dropped to a near six month low. The skew jumped 11.6% to 139.25 one of the highest levels on record (142.02 the record). The level is significant but more so is the rate of change as indicated on the chart below. This spread is greater than anytime during the 2008 equity selloff.

Skew VIX Dvergence versus SPX

 

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