Wednesday, June 24, 2009

The steepening volatility skew

From Bloomberg:
Downside skew, which gauges the relative cost of buying insurance against a slide in stocks, is now higher than it was when the Standard & Poor’s 500 Index dropped to a 12-year low on March 9. That indicates a “relatively high chance of downside moves,” the brokerage wrote in a report dated yesterday
Option skew is back to Feb-09 levels with out-of-the-money puts are getting bid up again as people are getting uneasy with the rally. The chart here shows how the skew (implied volatility for different strikes) flattened through the rally and steepened again recently (1 month options on SPYs with option strikes represented as % in or out-of-the money.)

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