Below is a chart of the spread between the volatility skew and the vix compared to the SPX. For those new to skew it simply measures the distribution of option implied volatility. When speculators price in tail events they buy out of the money options which "skews" or shifts the distribution of volatility from a normal bell curve.

To oversimplify skew one could argue it is an early warning system that tail events are being priced which likely will lead to a jump in volatility as measured by the vix. On Monday the skew did something pretty interesting while the vix dropped to a near six month low. The skew jumped 11.6% to 139.25 one of the highest levels on record (142.02 the record). The level is significant but more so is the rate of change as indicated on the chart below. This spread is greater than anytime during the 2008 equity selloff.

Skew VIX Dvergence versus SPX

By Tony Pallotta

http://macrostory.com/

Bio: A Boston native, I now live in Denver, Colorado with my wife and two little girls. I trade for a living and primarily focus on options. I love selling theta and vega and taking the other side of a trade. I have a solid technical analysis background but much prefer the macro trade. Being able to combine both skills and an understanding of my "emotional capital" has helped me in my career.

© 2012 Copyright Tony Pallotta - Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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