Option Skew

Even a casual observer of UVXY’s option chain will notice the disparity in extrinsic values between strikes DOTM and DITM.

It is well known that for indexes and most other symbols with options, that the Put side will carry larger premiums than the Call side. This is in respect of the old adage of “The markets take the stairs up and the elevator down.” Greater or faster downside risk necessitates the extension of higher premiums for Puts as opposed to Calls/

For volatility tickers, this disparity get amplified to represent the risks for either direction. Since there’s not much risk that UVXY drops 20% from an already low level for the closest expiration, there’s little to no premium that far below spot. However, strikes 20% above spot (a relatively easy reach) carry much more premium.

There’s nothing to game here, no mispricing, just a statement of probabilities that both buyers and sellers agree on. Though it is something to consider when working on a trade idea.

Leave a Comment

Your email address will not be published. Required fields are marked *