As the SPY comes into its 50 day moving average, what is the implied volatility saying in the derivatives market and is that a ‘tell’ we may be going lower.

The S&P 500 future is now $40 away from its October 5^th high. Implied volatility (a measure of risk, supply and demand, relative price, and an input into theoretical models) in the October monthly options rallied up from 12.76% to the current 16.22%, or about 3.46 percentage points. IV (implied volatility), given the pump up because of the sell off, this increased premium traders can work with, but also changed the recent trading environment.

The previous example in the SPY is a natural go-to guy for many reasons. SPY is super liquid and represents the S&P 500 index. This ETF does have a setback…skew. Skew is a phenomena in major products that is a result of large selling of OTM (out of the money) calls and buying of OTM puts. While this may seem strange it is completely natural for large institutional holders with systematic risk, or market risk.

The data below displays the relative price of 5% OTM puts and calls in October with 8 or 9 days til expiration. The point is that the most recent observation is relatively expensive, or you get the most bang for your buck by selling OTM puts and buying OTM calls in a ratio. The puts premium being taken in and using that to buy calls.

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mark@keeneonthemarket.com

Data courtesy of Thinkorswim