Here is a set of my recent observations, that might be interesting for the general public.
After 2000 Crisis SPY fell by 50%. After the 2008 Crisis SPY fell by 59% from its high. You see the respective percent marks calculated from the 2020 high on the chart. SPY 340 level was taken as the recent market high for convenience purposes.
Now, at Friday close 13.03.2020 SPY=270
PUT Options price on 13.03.2020 for SPY 199 strike expiring 30.06.2020 =8,5$(rounded for convenience)
Hence, the breakeven at expiration is roughly strike SPY=190
I know that there will be still some value left from Vola and thing but it could be neglected for the current analysis.
That means that for the 3,5 month of insurance, which protects your assets only after the market falls by another 29%(SPY 270 vs 190) here and later all comparisons are to be made with SPY 270 current level,
Because that was the last SPY price and that is the one the options price in question is based off. The market situation is dynamic but the logic persists.
So, the insurance price is 3,14% of the current SPY price.
Now, the above mentioned 2000 low in percent terms =SPY 170
So the SPY=190 breakeven vs SPY=170 equals 20 points of Hedge or 20/270=7,4%
That gives 7,4/3,14=2,35 hedge efficiency ratio.
The 2008 respective low in percent terms= SPY 140
190-140=50
50/270=18,5%
That gives 18,5/3,14=5,9 hedge efficiency ratio.
All that given that this hedge kicks in after the market looses 270-190=80/270=29% more.
Judging by the hedge efficiency ratio above one might assume that the hedge only makes sense if the hedger implies potential market collapse deeper that 50% in the coming 3,5 months(that is how long the insurance lasts)
The time span is important, given that it took SPY more that one year the to reach -50% during the last two crashes.
My thesis is that, judging by the options prices, the market is overpricing risk. Short term insurance is way too expensive.
It is within my imagining that it is the leverages players who are now seeking the insurance no matter the price just to make sure they won’t wake up one day to a massive margin call, but again, at these levels one should not have any long term leverage already.
Observations are to be updated as the market opens today and further into the week as the history unfolds.
Please, do share your observations and thoughts. The discussion is very welcomed.
After 2000 Crisis SPY fell by 50%. After the 2008 Crisis SPY fell by 59% from its high. You see the respective percent marks calculated from the 2020 high on the chart. SPY 340 level was taken as the recent market high for convenience purposes.
Now, at Friday close 13.03.2020 SPY=270
PUT Options price on 13.03.2020 for SPY 199 strike expiring 30.06.2020 =8,5$(rounded for convenience)
Hence, the breakeven at expiration is roughly strike SPY=190
I know that there will be still some value left from Vola and thing but it could be neglected for the current analysis.
That means that for the 3,5 month of insurance, which protects your assets only after the market falls by another 29%(SPY 270 vs 190) here and later all comparisons are to be made with SPY 270 current level,
Because that was the last SPY price and that is the one the options price in question is based off. The market situation is dynamic but the logic persists.
So, the insurance price is 3,14% of the current SPY price.
Now, the above mentioned 2000 low in percent terms =SPY 170
So the SPY=190 breakeven vs SPY=170 equals 20 points of Hedge or 20/270=7,4%
That gives 7,4/3,14=2,35 hedge efficiency ratio.
The 2008 respective low in percent terms= SPY 140
190-140=50
50/270=18,5%
That gives 18,5/3,14=5,9 hedge efficiency ratio.
All that given that this hedge kicks in after the market looses 270-190=80/270=29% more.
Judging by the hedge efficiency ratio above one might assume that the hedge only makes sense if the hedger implies potential market collapse deeper that 50% in the coming 3,5 months(that is how long the insurance lasts)
The time span is important, given that it took SPY more that one year the to reach -50% during the last two crashes.
My thesis is that, judging by the options prices, the market is overpricing risk. Short term insurance is way too expensive.
It is within my imagining that it is the leverages players who are now seeking the insurance no matter the price just to make sure they won’t wake up one day to a massive margin call, but again, at these levels one should not have any long term leverage already.
Observations are to be updated as the market opens today and further into the week as the history unfolds.
Please, do share your observations and thoughts. The discussion is very welcomed.