Does the skew agree with the move?

After a big move, I want to know whether skew agrees with it.

There are really two cases.

Case one: skew confirms the move.

Say something sells off by more than its expected move on the week, and put skew pops at the same time. Skew is moving in the same direction as spot, so it’s backing up the move. When that happens I tend to stay out of the way.

Same on the upside. A sharp rally with call skew getting dragged along with it. If anything, the breakout looks on, and I’d be more interested in buying dips.

Case two: skew diverges.

If spot and skew are doing opposite things, that’s a divergence. Say there’s a really sharp rally and put skew has held up very well. People are still paying for downside protection even as the market climbs.

All that does is tell me to pay attention. Potentially something isn’t lining up. Hedging some longs might not be a bad idea.

It’s the lens behind a lot of what I’ve been writing about lately: NVDA flagging at the highs, COST running out of steam while WMT broke out, bonds that still haven’t given me the all-clear.

It’s far from foolproof, and I wouldn’t trade on it blindly. I use it as one more lens to watch the market through.

Using a signal like this without letting it make the decision for you is why you need a framework.

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