Rally With Morning Coffee
We have a mild rally this morning and it is not too surprising. The selling this week was more like someone needed to sell. Many of the big cap names were slammed, most likely to pay for bond positions that were blowing up. The short Euro trade must be hurting a lot of folks. Those folks should want some juice.
The thing is the skew did not get steeper. Note the volatility surface in OptionVision™. The big bulges in IV were closer to the money and the OTM puts did not rise as fast.
The SDEX is a fairly new skew product, but is a nice indicator for steepness of skew in the 30 day cycle for the 25 delta put. The general range is 71 for a steep skew to 61 for a flat skew. Today the SDEX tanked to 63.31 down 1.46. What does this mean? Put owners were taking profits and the ATM option got bid. Traders are looking for a move from the money not a crash to the OTM. We are getting that move this morning.
The skew should steepen again as we rally if the ATM starts to decline (rally mode). Upside call butterflies in the big indexes will look good.
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