collar prices on S&P 500 ... signaling a downturn?

S

stockmarketbeginner

Hello,

I noticed something interesting: it costs way more to insure the s&p 500 in June compared to Microsoft or the QQQ tech etf. I looked at the +/- 10% collars for June:

IVV (S&P 500):
sell 310 June call at .30, .50 bid/ask
currently trading at 282
buy 250 June call at 1.75, 2.35 bid/ask

MSFT (Microsoft):
sell 100 June call at 1.37, 1.41 bid/ask
currently trading at 90
buy 80 June put at 1.35, 1.42 bid/ask

QQQ (Powershares Nasdaq tech etf):
sell 180 June call at 1.45, 1.59 bid/ask
currently trading at 166
buy 150 put at 2.21, 2.22 bid/ask

The S&P 500 had, by far, the worst collar price (and larger bid/ask spreads). The collar pricing is very pessimistic, meaning it costs you way more to buy 10% downside protection rather than sell 10% upside gain. Microsoft was very price neutral. QQQ was pessimistic, but not as extremely pessimistic as the S&P 500.

Intel (INTC) has an optimistic June collar pricing, even though it has bad publicity with its security vulnerabilities in its chips:
48 June call: 1.35/1.42 bid/ask
45 current price
40 June put: 1.02/1.07 bid/ask

For a +/- 5% in June, the S&P 500 is more neutral:
290 call: 4.00, 4.50 bid/ask
282 current selling price
270 put: 4.00, 4.60 bid/ask

So it seems like the market is saying "the chances of the S&P being +/- 5% in June are about the same. But the chances of the S&P being 10% down vs. 10% up are way higher." One could say this is due to the recent 5% run-up in the S&P. But Microsoft has run up recently as well, yet its collar into June maintains price neutrality.

I thought if you bought offsetting collars, they would essentially offset in price. Meaning, if you sell a +10% call and buy a -10% put on the same equity, your net bid/ask should be minimal, and your purchase cost should little more than the transaction costs (yay!). But the S&P is not even close to being price neutral.

Does this signal a summer downturn for the S&P or the overall market? The prices for insuring the S&P with a neutral collar get worse as you go along into the calendar year:

February
IVV (S&P 500):
sell 310 call at .0, .20 bid/ask
currently trading at 282
buy 250 call at .10, .25 bid/ask

March
IVV (S&P 500):
sell 310 call at .0, .20 bid/ask
currently trading at 282
buy 250 call at .40, .60 bid/ask

So you can see how it is getting progressively more expensive buy the downside (compared to the equivalent upside) as you go further into the year for the S&P. Yet Microsoft maintains neutrality: the price of a +10% call is the same as a -10% put. And Intel is actually price-optimistic.
 
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There has always been a premium to buying protection on the spx compared to it's constituents... This isn't new and it doesn't mean anything other then people are willing to pay a premium to hedge with index options as opposed to holding a basket . And commission is cheaper...
 
cdcaveman said:
There has always been a premium to buying protection on the spx compared to it's constituents... This isn't new and it doesn't mean anything other then people are willing to pay a premium to hedge with index options as opposed to holding a basket . And commission is cheaper...
More...

Thanks! How does the options computer "know" to charge more for an index's downside protection? I thought the price of a put/call was almost purely a function of how far away the put/call is from the stock's current selling price, and how much time until expiration.
 
In general, SPX skew charts have always shown the downsides having higher IV even in a raging bull market. Doesn't mean that the market is expecting a crash. Just means that more takers hedging on a downside move and neutralizing any risk that they have when they are pyramiding longs.
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What might be interesting is to see how the skew have changed across the last 30 days, when the sentiment went from tax-cuts-are-coming to these-tax-cuts-are-huuuge

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Last month of skew charts show a steady drift with nice arbitrage opportunities at the 2400 level. But its straightened out now.
 
cdcaveman said:
There has always been a premium to buying protection on the spx compared to it's constituents... This isn't new and it doesn't mean anything other then people are willing to pay a premium to hedge with index options as opposed to holding a basket . And commission is cheaper...
More...
That and yesterday was LEAP expiry. Lots of rolling activity and lots of profits to lock in. I'm sure there was a lot of fixed income rolls too which would have bid down calls and bid up puts.
 
InTheMaking said:
In general, SPX skew charts have always shown the downsides having higher IV even in a raging bull market. Doesn't mean that the market is expecting a crash. Just means that more takers hedging on a downside move and neutralizing any risk that they have when they are pyramiding longs.
View attachment 181708
View attachment 181709

What might be interesting is to see how the skew have changed across the last 30 days, when the sentiment went from tax-cuts-are-coming to these-tax-cuts-are-huuuge

View attachment 181710

Last month of skew charts show a steady drift with nice arbitrage opportunities at the 2400 level. But its straightened out now.
More...
Nice charts. How can I get them?
 
ironchef said:
Nice charts. How can I get them?
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IB's TWS platform. They recently introduced the 3D plots. I don't claim any level of sophistication in using them. I usually put ratio spreads to give me margin relief and a much needed negative hedge. Using the charts, I've figured out how to get a hedge that "bleeds" into profitability over time.
 
InTheMaking said:
IB's TWS platform. They recently introduced the 3D plots.
More...
Yes they did. Now if only they could do the same for multi-leg strategies that show P&L for date AND price (and a volatility slider that updates in real time...if I'm being greedy :p). Remarkably efficient too for being a web based chart.
 
stockmarketbeginner said:
Thanks! How does the options computer "know" to charge more for an index's downside protection? I thought the price of a put/call was almost purely a function of how far away the put/call is from the stock's current selling price, and how much time until expiration.
More...

Don't be confused.. the actual price of any option is based completely on supply and demand....historically market participants have paid more for otm puts then otm calls.. price is market driven not model driven
 
beerntrading said:
Yes they did. Now if only they could do the same for multi-leg strategies that show P&L for date AND price (and a volatility slider that updates in real time...if I'm being greedy :p). Remarkably efficient too for being a web based chart.
More...

How do you take advantage of skew on multi-legs? I havn't seen too many traders use skew very effectively besides arbitrage. Some use it for predicting a certain price point and work a contrarian position against it, etc
 
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