Thursday, August 26, 2010

S&P 500 (SPY) - Trading the Weekly Skews

SPY is trading $106.22. The LIVEVOL™ Pro Summary is below.

This is a continuation of the trades using the weekly options. Previous posts can be found here:

8-24-2010: S&P 500 (SPY) - Scalping Skew in the SPY Weeklies
8-12-2010: SPY - Trading the Weeklies
8-11-2010: Goldman Sachs (GS) - Weekly Trade; Selling Vol Expansion

As I've stated before:
The strategy has worked because we have been able to sell 4 or even 5 options with high vol against one long lower vol option with the first weekly expiration wiping the slate clean for the first two sales. We hunt weekly skew, and then we hunt volatility smile skew.

Selling more options than you’re long does pose tail risk. For this reason, I prefer the SPY to any one company. A myriad of tail events which occur in companies, can’t occur in an index like bankruptcies, takeovers, lawsuits, frauds, special dividends, etc.

Let's look at the SPY skew today (click to enlarge):

Trade Stats
Let's analyze it again.

Buy 1 SPY (W) 9-03-2010 106 put for $1.59
Sell 2 SPY (W) 8-27-2010 105 puts at $0.31
Net debit is $0.97. The individual leg prices don't really matter; let's see how a $1.00 purchase would have done.

For margin requirements and hedging given the wild market of late, purchasing the SPY(W) 8-27-2010 103 puts for $0.08 or the 104 puts for $0.16 could be the wise move.

This is trade analysis, not a recommendation.

Disclosure: I have this position, net debit $1.00 and will probably purchase the SPY (W) 8-27-2010 104 puts soon.

If the market doesn't open gap down tomorrow, I may be quick to sell that protection.

Legal Stuff:


  1. Ophir,

    Is it mainly one day before expiration you are considering this type of trades?

  2. Pretty much. On Thursday the new weeklies come out so we can spread them.

  3. on IB I see zero OI and no volume for the Sept 3 put. Do you think it is that normal?

  4. So zero OI makes sense, as the new weeklies only start to trade on Thursday (today). I see 3,797 traded so far today.

    If you meant the Sep MOnthlies, I see 182,393 OI with 35,150 traded today.

    Is this what you meant?

  5. Yes I meant Sept 03 , ok for the OI but in fact all the volumes except these ones are updated, I will ask IB why they are not updated


  6. ok, seems like a sight data problem over there today.

  7. cool ride... did you buy 104 protection?

  8. I did; sold it out already. I'm ok with the 1 x 2 for now. Ask me again in 4 hours, lol. I will update this trade when I'm out (whether that be a winner or loser).