Cheap downside protection says complacency, and complacency can last

When index puts are cheap relative to calls, nobody is paying much to protect against a fall. That is a sign of complacency, and complacency is a warning. It is also a warning that can stay lit for a long time while the market keeps rising.

Cheap insurance is not a signal to sell

Skew measures how much more investors pay for downside puts than for upside calls. When it is unusually flat, fear is low. Markets with low fear are vulnerable to shocks, but they can also run for months, because low fear is often a response to steady conditions.

The mistake is treating cheap protection as a timing signal. It tells you how the market is positioned, not when that changes.

What I'm watching

• Index skew against its own range
• The volatility term structure, which steepens in calm markets
• Credit spreads, which tend to move before equities in a real turn

Where I stand

Long. The backdrop is calm and cheap protection says so; I would rather respect the calm than front-run its end.

What would change my mind

Credit spreads widening while skew stays flat. That is stress appearing somewhere the options market is not yet looking, and it tends to matter.