SPX Skew Snaps Back
SPX Skew Snaps Back
On Saturday I pointed out how out of whack SPX skew had gotten. You can read all about it here. Option traders, when SPX skew gets this out of whack it is not going to be there for long. While the market was in the positive this morning, this SPX structure held up; however, the moment the market began to turn around, so did the skew trade:
To compare how our IV's moved letís look at the volatilities of the trade from Friday, here is the 1365 strike:
The IV of the 1365 was up about .3% from Friday. Meanwhile take a look at how the 1300 puts moved:
They were up more than 1.2%, a huge increase in relative terms. The ratio between the 1365's and 1300's is now 140%, a 15% shift from Friday!! If one had bought 2 puts and sold the 1 this morning the trader could have done it for even. As the Skew shifted throughout the day, one would have been able to flip out of the 3 contracts for a profit of over 1.50 at one point (that 150.00 in about an hour for those keeping score). At dayís end it settled at a debit of .55 a gain of 55.00.
For those keeping score of overall volatility, ATM IV has risen for several days in a row. We killed Osama Bin Laden, and the market was down. IV skew has bottomed and appears to be rallying, and we are seeing the precious metals take it in the chin. I am feeling a slightly bearish in the near term. I donít think we see the market tank, but I think we see 1350 before we see 1375.
Mark Sebastian is the Director of Eduction for Option Pit, and a former market maker on both the Chicago Board Options Exchange and the American Stock Exchange. He has been published in nationally on Yahoo Finance, quoted in the Wall Street Journal is a featured contributor for TheStreet.com. He also writes regularly for SFO, and OptionsZone, and is the managing editor for Expiring Monthly: The Option Traders Journal.
View Mark Sebastian's post archive >