On the surface, all's well with the U.S. stock market. Sure, a growing chorus of Cassandras is warning about an imminent crash, but the economy remains strong, profits are still on an upswing, and stocks have recovered from a swoon in January and February to hit a new all-time record high. But a close look at the action in options reveals that many investors are buying insurance against a big market tumble. The CBOE SKEW Index was developed in the aftermath of the 1987 stock market crash, as a measure of investor unease with the market. It recently registered its highest levels of worry among investors since its inception in 1990, Business Insider reports.

The 1987 Crash

Dow Jones Industrial Average plummets 22% on 'Black Monday'
U.S. stock decline triggers meltdowns in global markets
Sell-off fueled by computer-driven programs
Federal Reserve slashes interest rates, banks add liquidity

Source: Investopedia

What SKEW Measures

The SKEW Index measures tail risk, or the risk of extreme market moves. More specifically, it tries to gauge the odds that investors are placing on the possibility that returns on the S&P 500 Index (SPX) will be below the mean by two or more standard deviations during the next 30 days. It does this by looking at the pricing of options contracts linked to the S&P 500. When the SKEW is valued at 100, options traders are expecting that tail risk, or the probability of a downward move by the S&P 500 of more than two standard deviations in the next 30 days, is tiny. The more that premiums on out-of-the-money put options on the S&P 500 exceed premiums on out-of-the money call options, the value of SKEW rises, reflecting options traders' increased concern about the likelihood of a big market plunge.

The typical range for SKEW is between 100 and 150, with 119 being the average since inception in 1990, and an all-time high of 159 having been reached on Aug. 13, per the CBOE. As of Sept. 20, the SKEW was at a value of 145. The 200-day moving average has been on an uptrend since 2008, and now is above 130.

Traders' Concerns Mount as Stocks Reach Records

Source: Yahoo Finance

'Trap Door Below the Market'

A number of market watchers see rampant overvaluation and speculative frenzy in the market, leading them to predict steep market declines ahead, perhaps as the opening chapter of an extended bear market. The most bearish of the bunch, so far, has been investment manager John Hussman, who, in July, called for plunges of 60% or more for major U.S. stock indices, greater than those predicted by other figures such as David Stockman and Mark Mobius. (For more, see also: Why the S&P May Fall More Than 60%: Hussman.)

A further market advance since then has made Hussman only more confident that a big decline is inevitable. "Last week, the stock market recorded the most offensive valuation extreme in history," he wrote in a Sept. 4 blog post, as quoted by Business Insider, adding, "I am aware of no plausible conditions under current extremes are likely to work out well for investors." He also asserted that "the current extreme is  combined with unfavorable market internals," such as narrowing market leadership, individual trading that is becoming more "idiosyncratic," as Business Insider puts it, and weakness in corporate bonds, "which indicates a subtle shift of investor psychology towards risk aversion, and opens up a trap door below the market."

Economist Robert Shiller, developer of the CAPE ratio to measure stock valuations, has weighed in with his own prediction of "bad times in the stock market" ahead. However, rather than a thudding crash, he sees years of subpar returns ahead, to correct for the outsized returns enjoyed in the current bull market. Another widely-quoted economist, Nouriel Roubini, warns that the seeds of the next financial crisis are being planted right now. (For more, see also: JPMorgan Defies Bulls, Tells Investors To Cut U.S. Stocks.)

The Bullish Case

Meanwhile, there is no shortage of bullish views to counterbalance the bearish outlooks. Veteran market strategist Richard Bernstein, formerly of Merrill Lynch, says "The signs of a true bear market are nowhere to be seen," and that some of the protective measures being taken by investors are counterproductive. "The market will be higher in 10 years," is the unequivocal belief of Larry Fink, CEO of fund management colossus BlackRock, in comments at a Yahoo Finance conference. He noted that even investors who bought stocks shortly before the Lehman Brothers collapse have more than doubled their money. A rising economy and rising corporate profits spurred by tax cuts give him optimism, as well as the fact that the market's P/E ratio has gone down in the past year. (For more, see also: Why a Bear Market Won't Happen Soon: Richard Bernstein Advisors.)