SKEW - A Measure of Tail Risk Hits All-Time Highs

Very high "skew" reflects an implied probability distribution with a "fat left tail" - assigning a larger than normal probability to significantly negative outcomes. What’s notable here is that unusually large option skew approaching the 1987 crash suggested that option market participants were implicitly aware of the "too good to be true" nature of the advance, and were compensating by pricing options to better reflect the risk of a steep market drop. What’s equally notable is that the 10-day (exponential) moving average of option skewness hit the highest level in history last week. -- John Hussman, December 30, 2013

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