SPY - One Day Skew Trade

SPY is trading $120.20, ripping up 1.7% with IV30™ down 13.4%. The LIVEVOL™ Pro Summary is below.



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As I mentioned in an earlier post today (Amazon (AMZN) - Short-term Skew Peaks on Market Fear), the downside vol is remaining elevated in these expiring options because the fear of a big down day has been re-introduced to the market by it's recent drop.

Let's take a look at the SPY skew today.



I've highlighted the 119 strike and the vol difference between the Nov 26 weeklies and the Nov monthlies (expiring tomorrow). The weeklies are priced 8 vol points higher, or ~50% more expensive than the Nov 26 weeklies.

Let's look to the Options Tab and talk about some trades to analyze.



Possible Trades to Analyze
1. Buy the Nov 26 weekly 119 put for $0.59 and sell the Nov monthly 119 put @ $0.18. This spread pays $0.41. I like this trade for a few reasons:

1. It's a one day trade on the super elevated expiring monthlies. If SPY sits here, it should be a winner if vol remains unched in the weeklies as the put would be worth $0.50 and the sale would expire worthless.

2. If the market catapults down, say $2.00, like today, here's the scenario I see:
SPY closes: $118.2
Short puts are worth $0.80 (parity).
Long puts with vol unched would be worth: $1.41
So the $0.41 spread would be worth $0.61, nice... But, if the SPY goes back down $2.00, the vol would go up in the long puts. So the spread would more likely be worth ~$0.72 (that's a two point vol jump in those puts after decay). So, really, the downside is not the problem (other than a total market collapse, like 7+%)

3. If SPY goes to 120 (down small) and vol remains unched, the spread would be worth ~ $0.55. Another nice little win.

The risk is if the market goes up. I see breakeven ~ SPY at 120.40. This allows for a small dip in vol as well (maybe 0.5 point).

So, in conclusion, this trades could win if SPY <= 120.40 and risks just $0.41 for that bet. Of course, this is just hypothetical mumbo jumbo, but it's really fun mumbo jumbo. Alternatives are all kinds of 1 x 2 or diagonals with time spreads. This is trade analysis, not a recommendation.

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