Shifting Sands
Just ahead of the continuing resolution the market is doing a little flim-flam. Basically traders are trying to handicap the budget process and starting to place bets accordingly. In a big index ETF like the SPY that starts to shift the skew around while liquidity providers deal with the different market forces.
If you look at the OptionVision™ Landscape, the real action is in the downside puts expiring Oct 4th. Note that the implied volatility is kicking up a bit more there. The Sep 27 term (far left) shows higher IV since it is expiring tomorrow and that is normal. The Sep 30 Quarterlies show some downside curve expansion since they expire on Monday. The ITM puts you ignore for market width (those are the tall green buildings up front) variation that gums up the Implied Volatility calculation.
That leaves the two nearest October terms. Paper looks like it is running for protection but just a bit so far. That makes sense given the fluidity of the budget talks. Watch to see if the expansion in skew continues pushing up the VIX today. At least from current pricing VIX is not really moving from ATM as much OTM.
The trade would be to buy some ATM options in the SPY and finance with more OTM puts in the nearer Oct cycle. Keep the trade contract neutral. I would wait until the last minute on Friday.
OptionVision™ – data from ORATS
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