Whither the Skew
While the administration decides what to do about Syria most of the economy seems to be humming along at a steady if unspectacular rate. But whenever there is saber rattling going on in the Middle East that seems to take a front seat to the slightly improving underlying conditions. You don’t need to go past the IV changes in the SPY to see that.
In the OptionVision™ landscape I have implied volatility change in the SPY. Note how the IV increased (green) yesterday pretty much in every strike in the index. This effectively put the decay back into the options prior to the weekend. No doubt this was from the possibility of action in Syria. Take note how the rise in IV occurred on the close. The more ATM options saw IV increase more than the OTM put options. The market for volatility moved from a panic type set up to one of just plain moving.
Implied volatility can increase and the skew can flatten like it did on Thursday. That usually means the market is aligning for a rally, or at least not a crash, since the bid for downside protection subsides. There are still too many moving parts with respect to the Middle East so maybe it is better to trade this a little wider. Maybe a SPY OTM strangle swap selling next week’s term (Sep 06) and buying the following weeks term (Sep13) should pick up the decay that the market put back yesterday. An ATM time spread that works with a 1% move up or down in those terms might work as well. While there could be action this weekend, it seems like getting the coalition together might take more than 3 days. That is what the current change in skew says anyway.
OptionVision™ – data from ORATS
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