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The Black Swan Index Notches Higher

“Where some investors see nothing but rolling green fields and placid summer lakes, others see black swans circling high above.

Such is the picture painted when comparing the widely followed Chicago Board Options Exchange Volatility Index—the market’s “fear” gauge— and its sister measure, the Skew, aka the “Black Swan Index,” which charts, well, lots of fear. (The black swan is a metaphor for a highly unusual occurrence and took on added significance in the market following Nassim Taleb’s 2007 book, “The Black Swan.”)

While the VIX is closing in on historic lows and has tumbled nearly 20 percent year-to-date— meaning there is a high level of complacency among investors— the Skew has surged in June, rising more than 12 percent for the month.

Taken together, the two measures reflect an interesting dichotomy among investors.

One crowd, buying plain-vanilla VIX options, anticipates a smooth ride, while the other is not necessarily anticipating but at least bracing for not just an ordinary market disruption—say, a weak economic number or one-off geopolitical event—but something really off the wall happening and knocking the seemingly indestructible stock market for a major loop.

“It’s just up like a hook for the whole month of June,” said Catherine Shalen, the CBOE’s director of research. “What’s happening is that in spite of the fact that everybody says the VIX is low and the market is complacent, the market is not complacent in every way. This is telling us that some investors who trade in options believe that the probability for a sharp, three-standard-deviation move has increased.”

The VIX measures near-term or next-term options whose price targets have not been hit—called “out of the money”—and its long-term average is around 20, as opposed to the 11 where it traded Tuesday. The Black Swan, or Skew, uses an options formula to gauge risks greater than the VIX. A reading of 100 indicates little risk of “fat tail” or highly unusual events; the index is now trading around 139 and was at 143 Friday, its second-highest level ever…..”

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