What is the SKEW index?

The CBOE SKEW index measures the skewness of the implied distribution of S&P 500 returns derived from options prices. In plain terms, it captures how much options traders are willing to pay for protection against extreme downside moves relative to more moderate outcomes. A higher SKEW reading means the market is pricing in a fatter left tail, greater probability of a crash or outsized negative event, even if the overall VIX level appears calm.

The SKEW index typically ranges from 100 to 170, with 100 representing a perfectly log-normal distribution (no tail risk premium) and higher values indicating increasing concern about outlier events. Readings above 150 have historically preceded or coincided with significant market stress. However, SKEW can remain elevated for extended periods without a crash materializing, making it more of a sentiment gauge than a timing indicator.

The distinction between VIX and SKEW is analytically important. VIX measures the overall level of implied volatility, reflecting expected magnitude of moves in either direction. SKEW specifically captures the asymmetry between put and call demand. A market can have low VIX (calm day-to-day conditions) but high SKEW (extreme crash protection is expensive), which signals complacency in aggregate combined with nervousness about tail scenarios. This combination is often considered more dangerous than high VIX alone, because it suggests that the market is priced for smooth sailing but the smart money is quietly buying insurance.

For portfolio managers, SKEW provides insight into the cost and demand for tail hedging. When SKEW is low, protective puts are relatively cheap, making it an opportune time to add portfolio insurance. When SKEW is elevated, tail protection is expensive, reflecting crowded demand. Some investors use the VIX-SKEW relationship as a regime indicator: low VIX and high SKEW suggest buying protection is wise, while high VIX and low SKEW suggest the worst may already be priced in and selling volatility could be profitable.