If you track the CBOE:SKEW index, it reveals when put options on the S&P500 (AMEX:SPY, FX: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 CBOE:SKEW and to show you what that high CBOE:SKEW looks like in options prices, I have pulled up the prices of one month options on AMEX: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 AMEX: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 CBOE: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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Here we are at expiration a month later and you can see what happened after there was "huge demand for put options" which drove the price of puts to double the price of calls. 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)
Tim, thanks for sharing this and the unique data! It's been featured in Editors' Picks. And you're a Wizard!
PhuThongTrader
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@TradingView, how can i update my skills,exp on tradingview education zone ?
Siliconcapital
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Pandorra
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I think U.S. Credit default spread (CDS) is the reason of near-the-money Put options/Call options price ratio in your observations. But of course.. Of course.. Bloombergs, CNBSs... and other Blah-Blah financial media say nothing about it.
However .. Take a look.. Where we were 14 years ago in Q1 2009. And where we are..in Q1 2023.
What "Markets participants" are doing? They are doing exactly the same like 14 years ago. They're selling the nearest VIX Futures contracts.
P.S.. Everything will be fine 😄
wardaK
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Amazing. THank you so much!
scheplick
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Thanks for sharing this, Tim. Super interesting and good to learn and know. Will start watching this.
Pandorra
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Have u seen Vix!? Lol
kh1718
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Sorry I am not into options can someone explain this in simpler terms ?
timwest
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@kh1718, There are many excellent books on options but what I recommend is to watch one market and plot by hand the options prices of calls and puts on a graph so you can 'see' and 'internalize' what each option price means. Compare what it costs to buy puts vs the cost to buy calls. Why would those prices be different? If the price for calls is double the price of puts, you could assume that there are a lot more aggressive buyers of calls compared to puts. Why would that be the case? Learn step by step and day by day and watch how prices change and how options prices change. You will learn as you go through this process.