r/options
QQQ Skew Has Flipped
QQQ skew flipped as puts trade richer than calls, signaling demand for downside protection despite a long-term bullish trend and fragile market structure.
- The long-term trend for QQQ remains upward, driven by AI and mega-cap concentration.
- The shift in skew is viewed as a normalization rather than a definitive bearish reversal signal.
- Downside protection (puts) is now trading significantly richer than calls, indicating increased fear.
- Market fragility is highlighted by the disproportionate reaction to recent job data, suggesting crowded positioning risks.
One thing that caught my attention going into next week is how much the QQQ skew has changed.
A week ago, calls were still trading richer than puts. Even after the rally, people were willing to pay up for more upside exposure and call skew remained intact.
That's no longer the case. Right now, downside protection is trading about 6 volatility points richer than comparable calls (based on the 25 delta's on each side for the weekly expiration). In other words, puts have become more expensive than calls.
It is back to the normal regime where the options market is no longer paying the highest premium for upside convexity. Traders seem more interested in owning protection than chasing additional upside.
I don't think this is necessarily a bearish signal. QQQ is still the cleanest expression of the current market: AI, mega-cap concentration, duration sensitivity, and crowded positioning. The long-term trend remains up.
The market is pricing roughly a ±$24.86, equal to a 3.55% move for the week in QQQ, which gives a 1SD range of about $670-$732.
To me, the takeaway isn't that QQQ is about to roll over. It's that after months of strength and a VIX near the lows, investors suddenly seem a lot more willing to pay for downside insurance after these strong job numbers. The market is clearly quite fragile and didn't need much to have an exorbitant move as the one we saw on Friday with QQQ closing down almost 5%
Curious if anyone else has been watching the skew shift over the last couple of weeks and how you will be trading given the current market structure change.
Skew is an important metric I keep my eye on. I was however looking more in direction of the bond market to gauge the health of the economy and the stock market as a function of that. Rate hikes odds are increasing next year according to some macro analysts at banks, but Bessent is still calm (supposedly). Meta and Alphabet issuing equity is not good, it feels like they are close to their breaking point if they cannot figure out how to stop the cash burn
Yeah Bessent is in a difficult spot…
I agree, how the market just ate up Alphabet’s equity issuance probably gives some of the others ideas…
Alright, where is this chart from cuz I like it. I’ve never tracked skew but I should - usually I’m lucky enough to bump into a redditor like you that makes me aware of these things.
I made the chart myself. I use them in my articles for market commentary. Will definitely post them more regularly in here if something interesting pops up and it can generate a good discussion.
Right. It looked good on Thurs as sort of Google just bought a bigger lead.
But Friday it started to look like, “oh sh*t, we’re going to drown in supply”
That said, these kind of trends die hard. So, would be surprised if we just cascade lower here. Expecting some serious chop tho.
I’ve been trading for almost a decade. There are definitely people on here that are more seasoned than me. But one of the biggest lessons I’ve ever learned is be hyper aware of what kind of market environment you’re in.
That may have changed this week. We are likely no longer in easy mode.
Last week was perfect for short risk reversals/collars to lock in gains due to call skew
It’s funny because I wrote a post on a Sandisk collar last week. 4 to 1 on the LEAPS, wasn’t received to well, 50% upside was not enough for most people.
Quite telling for the market conditions we are still in.
You're seeing the Vanna and charm effect kick in. Process starts before Opex, runs to the holiday.
It will be a highly anticipated OPEX once again, that’s for sure. It is a triple witching as well if I am not mistaken.
The flip back to put over call is less a new signal than a return to baseline. A cap weighted tech index carrying call skew was the anomaly, that was the melt up paying up for upside. Six vols of put richness at the 25 delta is pretty normal for QQQ once a pullback actually starts. The tradeable part is what the rich side lets you finance. Put verticals capture the expensive downside while capping the tail, and a collar gets cheaper to put on because the call you sell is now the cheap leg. Selling naked puts into IV that is rich and still rising is the spot people get hurt. One thing worth checking before sizing anything is whether this is a parallel shift across the whole skew or the front week steepening faster than the back. A steepening front tells you the market is pricing an event, not just a regime change.
Happens this time every year from my experience. Some factors can exaggerate moves so I wouldn't count on it annually, and there's underlying factors that make it too expensive and risky to time.
For most traders it's best to sit it out, wait for the storm to blow over. There's extreme moves affected by less liquidity which amplifies volatility.
Go on vacation, get projects done, relax and chill with friends and family. Spend some of that hard earned money, circulate it, enjoy it.
Long margin maintenance is higher than short maintenance in the whole AI side of tech.
Calls decrease, puts increase as the dividend approaches.
Holding shares requires capital to be tied up which deprives you of the riskless rate. However, the expected dividends are value-neutral for the shares position but create cash flow, so that reduces the amount of opportunity cost for carrying shares (you're not earning the riskless rate on your capital, but you are earning the dividend).
Since calls offer an alternative to shares exposure but require less capital, they require extra premium to you pay to the MM who hedges the sold call with long shares and is losing out on the riskless interest. But because that burden is reduced because of the dividend, that extra premium in the call is also reduced.
Once the QQQ dividend goes ex in a few weeks, the call premiums will pop back up to restart the cycle, and someone will say "there's call skew in QQQ!" And I'll make some comment somewhere about interest rates and carry and someone will say "rho doesn't matter!" (Which isn't what we're talking about, lol, but it's going to happen) And then we, too, can repeat the cycle
Where are you getting this data about QQQ skew ever flipping? From what I see on the options data terminal I use, the difference between the higher IV puts and lower IV calls decreased, but I don’t see that it ever actually flipped. Maybe my data isn’t granular enough though. On what DTE did this phenomenon occur?
Cool looking tool.
Does it know what the upcoming June dividend does to call and put extrinsic premiums?
https://www.nasdaq.com/market-activity/etf/qqq/dividend-history