Here is the chart from his post:

SPX on top, VIX in the middle, and CSFB skew index bottom

Adam Warner doesn’t see that the CSFB skew index adds much value.   He points out the huge dip in CSFB last October when VIX was hitting the 80s.  That has put many people off this index, why would there be a dip there?

CSFB tells you what your deductible would be on the put side if you were paying for it with a 10% out of the money call three months out.  What that means is, find the price of the call three months from now that is 10 % above the market.  Then look for the put three months out that sells for the same amount.  How far is that below the market?  That is CSFB for today.

To put on a zero- cost collar with options that expire in three months, sell the 990 call (SPX at 900) and that will finance  the put 19% below, at 729.  This is about 2/3rds of the max skew that CSFB has seen.

So last October, all the puts had high vol so the skew was low.   Counterintuitve, but possible.

One detail straight off is that the comparison should be with the VXV not VIX since VXV and the skew index measure three months out. Here is what VXV looks like:

S&P 500 Options Volatility Three Months Out

Not very different than VIX, a little higher, but still at a low point of the last six months.

Here are the other streaks of longer than 250 days without a close above the 200-day average, and the S&P’s percentage change three months later:

DATE          STREAK          CHANGE

08/05/32      414                   +6.3%

06/22/38      253                   +13.9%

09/25/70      330                   +9.4%

01/29/75      314                   +13.0%

01/04/02      314                   -4.0%

We’ll look closer at these streaks on the main site tomorrow.