This segment is all about skew, specifically, what it is, what it tells us and how we can take that information and find opportunities for high probability trades. This segment should have you looking at an options montage with an improved eye.
The November 4th, 2015 segment of Market Measures, “Why Implied Volatility Changes” showed us how a stock’s overall level of implied volatility (IV) drives option Puts and calls also have their own IV and we refer to the difference in their IV as skew.
A graph of the implied volatility of the out-of-the-money (OTM) strikes in the SPY (S&P 500 ETF) was displayed. The graph showed that OTM puts generally trade at higher prices than calls. This is due to market anticipation.
Next explained was how to gauge skew. A table gauging skew using the SPY at a price of $208 was displayed. The table showed the calls 10 points higher and the puts 10 points lower from the SPY price. It showed why selling puts may provide more opportunity than selling calls. A second table using the SPY from 2005-2015, compared 1 standard deviation puts to 1 standard deviation calls. The table included the percentage each was profitable at expiration and the average trade P/L.
An example of call skew in Natural Gas /NG was displayed. With /NG trading at $2.50 the example showed the January $2 put and $3 call (equidistant away from the future’s current price). The market perceives more upside risk than downside. That is due because of the low price and for the possibility of a cold snap in January sending prices higher.
Watch this segment of “Market Measures” with Tom Sosnoff and Tony Battista for the takeaways and other important information about the call/put skew in options and how it can present a potential opportunity for premium sellers.
This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.