“The skew index will offer the chance to take hedging or speculative positions on the skew of S&P 500 Index options, and consequently on the investors’ perception of forthcoming tail events such as extreme losses,” explained Shalen.
Skew reflects the fact that implied volatilities on options vary with strike levels, and is driven by supply and demand dynamics in the equity derivatives market. Historically, investors have purchased out-of-the-money puts to hedge their equity positions and sold out-of-the-money calls for premium. As a result, volatility for low strikes has increased, while volatility for high strikes has decreased.
If market participants expect a crisis, they would be more likely to buy put protection, which all things being equal would contribute to an increase in skew. Market participants could therefore take long positions in the index to hedge against future expectations of a tail event. Those who feel expectations of a crisis are overplayed could decide to short the index.
Shalen says the new product shows no correlation with market volatility, and any rise in the index is associated with the perception of correlated jumps in index stocks that occur during market crises.
En la nota se cita el siguiente paper de Peter Carr Towards a Theory of Volatility Trading (2002)