With the market rebounding off the January selloff despite weakening economic signals and geopolitical turmoil, traders have been taking precautions against a return of the dreaded black swan.
The CBOE SKEW Index, which uses out-of-the-money—lower than the market price—options to discern fear of an unusual event hitting the market, has been pushed to levels indicative that something may be at hand.
Over the past few months, the black swan index, as it is nicknamed, has been trading above its normal area and is drawing attention on trading floors.
"People are buying cheap protection. There are some people that think with the market sitting here we're ignoring too many risks, either from (Federal Reserve) tapering or emerging market instability from geopolitics," said Dave Lutz, managing director of trading at Stifel Nicolaus. "But that's trying to guess what a black swan event is, which by definition you can't do."