Volatility skew has gone flat in the SPDRs. Calls and puts are trading for nearly the same money right now.
I built a tool to track this in real time. What it showed me today has almost no historical precedent.
Nine days out in SPY, there is no skew left at all. Ten delta calls and ten delta puts carry virtually identical implied volatility.
Thirty days out, the gap narrows to six implied volatility points. Go thirty six days out and near money options sit at 13.4 against 12.4.
One point of separation. Markets never carry equal risk in both directions, yet that is exactly how this tape is pricing them.
AMD pushes it past absurd. The thirty day skew is inverted at 104, meaning the calls cost more than the puts.
Push it out to 90 days. Push it to 120. The calls still cost more than the puts.
The options market is telling you a decline is off the table entirely.
Here is what created it. Volume is the lightest I have seen since the holidays of last year, and there is no hedging activity underneath any of it.
We will be lucky to trade a million S&P contracts today. That vacuum explains the erratic, disconnected, almost broken feel to this trade.
Then look at what happened at the bell. The market ripped higher this morning and implied volatility rose right along with it.
When the market faded, volatility cooled off with it. The VIX is now moving in positive correlation with the S&P 500.
The semiconductors add the final piece. SMH clawed out of a horrendous correction and back into technical bull market territory.
I am not buying it. There is no size behind that bid, and it looks flimsy from where I sit.
Here is what I break down in tonight’s video:
- Nine day skew in SPY has disappeared. Ten delta calls and ten delta puts are priced at almost identical implied volatility.
- Thirty six days out, near money options sit at 13.4 against 12.4. That leaves one point of separation on a market with asymmetric risk.
- AMD’s thirty day skew is inverted at 104. The calls cost more than the puts all the way out to 90 and 120 days.
- Volume is the lightest since the holidays of last year. We will be lucky to print a million S&P contracts on the session.
- SMH is back in technical bull market territory with no size behind the bid. I am leaning toward bearish positions, and I will be short if it rallies tomorrow.
The advance decline line finally turned clean today. Semis, big cap tech, and financials all moved together for the first time in a while.
Correlation returning ahead of a Friday matters. It means the market may finally start moving in unison instead of chopping itself apart.
Cheap puts and returning correlation rarely sit together for long. Historically this pricing does not last more than a few days inside the SPDRs or the SPX.
