The S&P 500’s Skew indicator has dropped across the board to a one-year low, and the 1-month term in particular has fallen back to mid-last year levels. The logic behind it is simple: people unwind the Put protection they bought earlier, then turn around and chase upside by rushing into Calls. As a result, the IV premium of Puts relative to Calls gets squeezed very thin.

This kind of situation has often appeared in history in two phases: either shortly after the market has gone through a round of panic and entered a rapid rebound period, with everyone thinking, “worst is over”; or at the very beginning of euphoria, when people feel they’ll miss out if they don’t get in. But the problem is that when everyone stops hedging the downside, the market is often at its most fragile.

I’ve seen this setup too many times: Skew gets pushed to extremely low levels, and then some unexpected event (a policy shift, a data miss, a sudden geopolitical development) hits. Because there’s a lack of Put cushion, the market tends to gap down particularly hard. It’s not that a crash is guaranteed, but at least it signals that current positioning is very one-sided, with an asymmetric risk-reward profile.

Veteran traders’ experience: when the market no longer fears the downside, that’s often when you should start respecting the downside again.