If you track the
SKEW
index, it reveals when put options on the S&P500 (
SPY
,
SPX500
) are at high levels relative to calls. Sometimes that means there is a big event ahead and the market participants are buying "insurance" against a sharp drop in the market over the life of the options contracts.
So, I think it is important to track SKEW and to show you what that high SKEW looks like in options prices, I have pulled up the prices of one month options on
SPY
from the close yesterday (I did this work at the open today and posted it at my Key Hidden Levels chat room here at TradingView).
I have plotted just 3 different options for calls and 3 for puts to show you. The green boxes are the call options that are just "out of the money". The bottom of the box is on the strike price and the height of the box is the option premium which means the top of the box is the "breakeven price" where the
SPY
would have to rise to at expiration to be worth exactly what you pay for it (in this example).
I plotted the boxes at the expiration date as shown by the black line at May 19th.
410p = 410 put option = $492/contract ($4.92 per share, but a contract is 100 shares).
The 400p is $2.77 or 277 dollars for 1 contract which is 15 points down from the close yesterday. That compares to a 430c or 430 call option at $1.34 or $134/option contract. So the result is the market is willing to pay twice as much to protect against a decline in the market and only half as much to participate in an advance.
If you track this data day-to-day and week-to-week or after a large move in SKEW you can see how the market is thinking ahead of key news like the Fed Meeting Date on May 3rd. I graphed the Fed Meeting Dates with red-dotted lines to show you some key risk dates ahead. We are also in earnings season here and plenty of fears of recession or inflation, but mostly of the Fed hiking further.
I hope this graph is useful to visualize and understand options prices and how the market is positioned at the moment.
Cheers,
Tim
12:06PM EST, April 19th, 2023
SPY
,
SPX500
) are at high levels relative to calls. Sometimes that means there is a big event ahead and the market participants are buying "insurance" against a sharp drop in the market over the life of the options contracts. So, I think it is important to track SKEW and to show you what that high SKEW looks like in options prices, I have pulled up the prices of one month options on
SPY
from the close yesterday (I did this work at the open today and posted it at my Key Hidden Levels chat room here at TradingView). I have plotted just 3 different options for calls and 3 for puts to show you. The green boxes are the call options that are just "out of the money". The bottom of the box is on the strike price and the height of the box is the option premium which means the top of the box is the "breakeven price" where the
SPY
would have to rise to at expiration to be worth exactly what you pay for it (in this example). I plotted the boxes at the expiration date as shown by the black line at May 19th.
410p = 410 put option = $492/contract ($4.92 per share, but a contract is 100 shares).
The 400p is $2.77 or 277 dollars for 1 contract which is 15 points down from the close yesterday. That compares to a 430c or 430 call option at $1.34 or $134/option contract. So the result is the market is willing to pay twice as much to protect against a decline in the market and only half as much to participate in an advance.
If you track this data day-to-day and week-to-week or after a large move in SKEW you can see how the market is thinking ahead of key news like the Fed Meeting Date on May 3rd. I graphed the Fed Meeting Dates with red-dotted lines to show you some key risk dates ahead. We are also in earnings season here and plenty of fears of recession or inflation, but mostly of the Fed hiking further.
I hope this graph is useful to visualize and understand options prices and how the market is positioned at the moment.
Cheers,
Tim
12:06PM EST, April 19th, 2023
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When there is huge put open interest and high put prices relative to calls, it means that people are "hedged" and as the market falls, they don't have to sell because they already have put protection. So the market usually finds support and rebounds.
Very simply, this is a framework on how to look at the options market and understand what today's action implies on future price action.
May 19, 2023 12:31PM EST
(Click "update" to see what happened from April 19-May 19)