r/options
SKEW index useful?
Options trader questions the usefulness of the backward-looking CBOE SKEW index for selling deep OTM SPX credit spreads.
I mostly sell credit spreads on SPX that are pretty far OTM, like 5-15 delta. Wanting something more than the gaggle of VIX indexes, I stumbled upon the CBOE SKEW index. Thought it might be real time, but apparently it comes out once a day at the end of the day. Not useful for trading hours as it is backward-looking.
Also, it didn’t seem to consistently make sense. Sometimes SKEW was really high although there was a general lack of volatility and the market heading higher. For instance, SKEW on April 13th this year was very high yet VIX was relatively controlled and the market gained. A few days later the SKEW dropped a bunch. Then on the 21st, market dropped and VIX levels were very similar to the 13th, but the SKEW for that day was actually at a quite low level similar to a few days after the 13th.
If I’m interpreting things correctly, this tells us that OTM put spreads written on the 13th would have produced more premiums than they usually would have. But on the 21st we get the opposite story. The premiums relative to the risk of a dropping market and VIX measures similar to the 13th were not as good.
\-Do I have the above idea correct?
\-Also, does anybody use this measure? Seems useless if all it can tell you is that it would have been good to make trades after the fact.
\-Is there any other measure that tracks skew in real time?
\-Should I just use past experience and if I notice elevated premiums for a certain delta … then just trade more of them or go farther OTM?
High SKEW with a calm VIX means paying up for crash protection, which is the exact stuff you’re selling. That’s why your wings are richer those days. But, you can’t read the index that way. It’s a blended number off the whole surface, not your actual strike.
Also, nobody really trades off the SKEW index itself. Once a day and stale by the time you see it. Just read skew off the chain yourself. Look at your short strike’s IV versus ATM, or the put side against the call side at the same delta. Your broker software probably shows this too.
I’d be careful with sizing up or go further out just because premiums look fat. Those wings get bid up for a reason, sometimes the tail risk is actually real. If you press into a skew spike you can end up selling right into the move everyone’s worried about.
The edge is when skew is rich compared to what actually (or typically) ends up happening, not just when it’s high. Otherwise you’re basically selling fear to people who want it, and that’s how you can get burned.
I use TOS. Does that have a feature to read the skew, or would I just use the chain?
Is there some metric you would suggest for short strike vs ATM or put vs call at same delta? I’m assuming the IV for a given delta is almost always higher on the put side.
As for going farther out, that would be more a function of maintaining premium and delta instead of collecting higher premiums. Are you suggesting hit pause instead?
I realize the edge is when skew is rich compared to what actually winds up happening, but how would one know this when placing trades? What actually happens is a future that we can’t know at the time of trading. Or can we? My thought was to use longer-dated contracts between 14-35DTE which should provide ample time to close them at a profit when things flatten or reverse.
SKEW is useful as background, but I would not use the index as a direct entry trigger for far OTM spreads.
Your actual risk is at your strikes and expiry, so read the chain there: IV by delta, put wing richness, bid/ask width, expected move, and how the skew changes into events. A high SKEW can tell you crash protection is expensive broadly, but it does not tell you your specific short strike is mispriced.
This makes sense to use data at my strikes rather than broad measures across an entire chain.
Is there a baseline IV divided by delta to use? Or is this more something that I would have to calculate and track? Is there something in TOS that will calculate that?
I’m assuming put wing richness is in comparison to call wing at same delta, but again what is a baseline?
I hadn’t thought of bid/ask width before, but that is something for me to start paying more attention to. I’m assuming the wider it is, the more opportunity there is for a little spike to fill for relatively good credit. I’m not really looking for fatter premiums, but more stable premiums at strikes that are farther OTM.
Yeah, TOS has it. Product Depth, under the Trade tab below the chains. Set Value to Impl Vol and it draws the vol curve per expiration. Otherwise the chain with the Impl Vol column gives you the same thing in numbers. And right, the put side at a given delta is almost always higher than the call, that's index skew, it basically never inverts in SPX.
For a metric, easiest is short strike IV minus ATM IV. Track that over time and you learn your own normal. Risk reversal (put vs call same delta) is the cleaner academic read, but short-vs-ATM is enough day to day.
On going farther out, no, not saying pause. Moving strikes to hold delta and premium steady is just managing the position, that's fine. What I was warning against is sizing UP into a skew spike chasing the fatter credit. Sounds like that's not you.
On knowing the edge ahead of time, you can't know the future, nobody can. The edge isn't predicting the move, it's that far OTM SPX puts tend to be priced above what actually realizes. Over a lot of trades that's your structural premium. Any single one can still blow up. The 14-35 DTE plan is reasonable, gives you theta and time to close into a flattening.
No magic baseline. IV/delta isn't a ratio anyone really quotes. Pick your measure (short IV minus ATM IV) and track your own history so you know what rich vs cheap looks like for SPX. It's relative to its own range, not an absolute number.
TOS won't auto-calc the gap, no native skew study. Eyeball it in Product Depth or pull the IV column and subtract. Want it tracked over time, you'd script it or dump to a sheet.
On bid/ask, careful, wider isn't automatically opportunity. Wide wings usually just mean low liquidity, and you can get a bad fill as easily as a good one. If stable premium farther OTM is the goal, the cleaner play is consistent delta-based strike selection and decent DTE, not hunting wide quotes. Use marketable limits and let it come to you.
Yeah, TOS has it. Product Depth, under the Trade tab below the option chains. Set Value to Impl Vol and it draws the vol curve per expiration. Otherwise the chain with the Impl Vol column gives you the same thing in numbers. And right, the put side at a given delta is almost always higher than the call, that's index skew, it basically never inverts in SPX.
For a metric, easiest is short strike IV minus ATM IV. Track that over time and you learn your own normal. Risk reversal (put vs call same delta) is the cleaner academic read, but short-vs-ATM is enough day to day.
On going farther out, no, not saying pause. Moving strikes to hold delta and premium steady is just managing the position, that's fine. What I was warning against is sizing UP into a skew spike chasing the fatter credit. Sounds like that's not you.
On knowing the edge ahead of time, you can't know the future, nobody can. The edge isn't predicting the move, it's that far OTM SPX puts tend to be priced above what actually realizes. Over a lot of trades that's your structural premium. Any single one can still blow up. The 14-35 DTE plan is reasonable, gives you theta and time to close into a flattening.
No magic baseline. IV/delta isn't a ratio anyone really quotes. Pick your measure (short IV minus ATM IV) and track your own history so you know what rich vs cheap looks like for SPX. It's relative to its own range, not an absolute number.
TOS won't auto-calc the gap. Eyeball it in Product Depth or pull the IV column and subtract. Want it tracked over time, you'd script it or dump to a sheet.
On bid/ask, careful, wider isn't automatically opportunity. Wide wings usually just mean low liquidity, and you can get a bad fill as easily as a good one. If stable premium farther OTM is the goal, the cleaner play is consistent delta-based strike selection and decent DTE, not hunting wide quotes. Use marketable limits and let it come to you.