Black Swan Index - Definition & Meaning - PrudentWater
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Black Swan Index

The Black Swan Index is considered a kind of fear barometer for the U.S. stock market and measures the market’s expectations for the occurrence of a so-called ‘black swan’. A black swan is a symbol for a sudden and strong collapse of the stock market. The Black Swan Index bases its calculation on the amount of purchased put options on the S&P 500, which are out of the money at the time of purchase. If the index shows highs, this means that investors are increasingly hedging against setbacks and fear turbulence and thus losses on the stock market. In this case, investors buy put options, which are out of the money. If the stock market then actually collapses, the options go from being out of the money to being in the money or at least at the money, which causes the prices of the derivatives to rise and a profit is finally realized. The higher the probability estimated by market participants that stock prices will fall in the near future, the higher the level of the Black Swan Index. If, on the other hand, market participants do not expect any turbulence and price falls on the stock market in the near future, the index stands at 100.