SPX implied volatility higher than SPY

Occam · Oct 31, 2020

My understanding is that SPY options normally have higher implied volatility than do options on SPX, but at the moment it appears that IV (and prices) are higher for SPX, at least for immediate timeframes (ATM e.g. Nov 4 expiry). Does anyone know why this would be the case?

stepandfetchit · Oct 31, 2020

What is your data source? Please post what you are referencing.
IFF your source is indicating different IIV for ATM between PUTs and CALLs for SPX, this may be the source of confusion!

.sigma · Nov 1, 2020

Even if SPY IV is higher than SPX IV, what would its significance mean?

ffs1001 · Nov 1, 2020

.sigma said:
Even if SPY IV is higher than SPX IV, what would its significance mean?

I haven't looked at the numbers (it being the weekend), but if the SPY options have a higher IV than the SPX ones, then there would be a arbitrage opportunity. Eg. sell 10 of the SPY options and buy 1 of the same strike/expiry SPX option.

Sig · Nov 1, 2020

Occam said:
My understanding is that SPY options normally have higher implied volatility than do options on SPX, but at the moment it appears that IV (and prices) are higher for SPX, at least for immediate timeframes (ATM e.g. Nov 4 expiry). Does anyone know why this would be the case?

I'm sure we would all be very interested to learn where this "understanding" came from?

Kevin Schmit · Nov 1, 2020

Occam said:
at the moment it appears that IV (and prices) are higher for SPX, at least for immediate timeframes (ATM e.g. Nov 4 expiry).

This doesn't appear to be true, Vols are more or less equal as of close Friday.

Here are vols calculated off of options closing mid and underlying close:

BASE ,EXPIRY , ATMIV, D10PUTIV
SPXW ,20201104, .413202, .577516
SPY ,20201104, .416212, .584927

And here are vols calculated off of options closing mid and underlying closing mid:

BASE ,EXPIRY , ATMIV, D10PUTIV
SPXW ,20201104, .418737, .59106
SPY ,20201104, .42145, .586358

.sigma · Nov 2, 2020

ffs1001 said:
I haven't looked at the numbers (it being the weekend), but if the SPY options have a higher IV than the SPX ones, then there would be a arbitrage opportunity. Eg. sell 10 of the SPY options and buy 1 of the same strike/expiry SPX option.

SPY IV: 39.97%
SPX IV: 38.47%

I never looked at implied vol on different products (ETF vs Index) as an arb opportunity.

My understanding of arb is usually bid/ask spreads or free butterfly spreads, not the implied vol differential on different products.

Is this "arb" practical? Can someone really profit off this?

Occam · Nov 2, 2020

stepandfetchit said:
What is your data source? Please post what you are referencing.
IFF your source is indicating different IIV for ATM between PUTs and CALLs for SPX, this may be the source of confusion!

I stand corrected; I was using post-close data from web sites that were erroneous. Today I can see from higher-quality, real-time feeds that the IV is indeed slightly lower for SPX, at least for the strikes I looked at. Mea culpa!

Occam · Nov 2, 2020

Sig said:
I'm sure we would all be very interested to learn where this "understanding" came from?

It is due to American vs. European expiry, American expiry having higher IV due to early assignment risk, supposedly. I don't know exactly how much this impacts the IV of these series in practice; the bid/ask spread for SPX does seem a bit wider (due to contract size and/or popularity with retail, perhaps), and that may overwhelm any minor IV deficit in SPX.

Sig · Nov 2, 2020

Occam said:
It is due to American vs. European expiry, American expiry having higher IV due to early assignment risk, supposedly. I don't know exactly how much this impacts the IV of these series in practice; the bid/ask spread for SPX does seem a bit wider (due to contract size and/or popularity with retail, perhaps), and that may overwhelm any minor IV deficit in SPX.

That makes sense. Keep in mind that the actual spread on SPX options is generally right off the mid when you put in a limit order, even though the published bid/ask is wider. So if you used that to calculate your IV it might match even closer.