The Nations Large Cap SkewDex Index compares the implied volatility (IV) of a 30 DTE at-the-money SPY put to a 30 DTE out-of-the-money SPY put at one standard deviation (68.3%). This aims to show how expensive OTM (out of the money) options are in relation to ATM (at the money) options.

On a more technical level, this shows how expensive skew (differences in implied volatility on different strikes for the same day) is at the edge of the expected move (a one standard deviation move for a specific time period). This indicates how much hedgers are willing to overpay for portfolio insurance or how confident speculators are that the market will crash within 30 days. On a more basic level, it communicates market sentiment and how much fear long-only investors have. If skew gets too extreme, then contrarians know that IV crush (sharp drops in implied volatility that lower option prices) can provide strong fuel for a rally in the form of vanna flows–the effects of implied volatility on delta. 

Often used as an alternative, the CBOE SKEW Index (SKEW) also attempts to measure relative changes in skew, but it is arguably obsolete in comparison. The SKEW index only gets updated once a day (as opposed to every 15 seconds like SDEX). And as another drawback, the CBOE SKEW index does not measure the cost of OTM options to their relative value against ATM options, which will lead to distortions and fail to factor out changes in the overall volatility levels (Nations, 2022). 

SDEX whitepaper: <https://nations.com/wp-content/uploads/2020/01/Nations-SkewDex-Index-Fact-Sheet.pdf>