r/options
SPY Isn't Pricing Much Movement, But Protection Is Still Expensive
SPY options imply a quiet week, but downside skew shows investors are paying a premium for protection.
- Investors are paying more for downside protection, indicating increased caution.
- Downside volatility is trading significantly higher than upside volatility.
At first glance, next week's SPY setup looks pretty boring.
- SPY: \~$746.74
- Expected move: ±$11.50
That's a fairly quiet week by recent standards.
Downside volatility is trading about 3.9 vol points above upside volatility, which creates a noticeably wider downside range than upside range.
1SD range:
- Upside: $756.68 (+1.33%)
- Downside: $733.31 (-1.80%)
2SD range:
- Upside: $766.76 (+2.68%)
- Downside: $720.13 (-3.56%)
So while the market isn't expecting a big move, traders are still paying more for protection than for upside exposure.
Skew-adjusted distribution Model
To me it looks like investors have become a bit more cautious after the recent volatility and are willing to spend extra on insurance. This is the normal regime, but over the last few months, calls were often priced more expensively as investors became more complacent.
Curious how others are interpreting SPY skew right now. Has anyone else noticed the shift over the past couple of weeks?
Puts on SPY are practically always overpriced because people buy them for portfolio insurance. Sellers win every month until they dont.
That’s normal
It is and that’s as well what I mentioned at the end of my post. However, over the last few months, calls were often more expensive than puts.
At a given strike, SPY call extrinsic will usually be higher than the put extrinsic. But going some number of points away from spot or forward, the OTM put will usually be higher than the OTM call. This has been the case for the past few months and prior and will continue to be the case
The main exception to the "usually" above is when the dividend is getting closer
yeah this tracks with what i've seen too. you're not alone in this.
Where is the Skew graph image from? Like what website? Im guessing its a standard deviation graph based on options pricing?
The downside premium here is the path, not the level. SPY has a strong negative spot vol correlation, so when it sells off realized vol expands, which means the wider downside range is the market pricing conditional volatility rather than mispriced insurance. Comparing put and call extrinsic at the same strike mostly picks up put call parity (forward, rates, dividends). The cleaner read on skew is equidistant OTM by delta. And the reason selling that skew pays most weeks and then hurts is that the variance risk premium is structurally fatter on the downside, so the payoff is negatively skewed by construction. You collect steadily and pay it back in the tail weeks. Before calling 3.9 vol points expensive I would check it against its own trailing range, the absolute skew level is a weak timing signal on its own.
https://preview.redd.it/9r95zpjmq29h1.png?width=1600&format=png&auto=webp&s=cefc1f2ddbbd571b685f975a8338c7ab0f885a5e
Look at SPY and the DJI pair. Thin might the start of a new trend