Market Measures

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Selling SKEW

Market Measures

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The CBOE’s Skew Index measures the probability of outlier returns in the S&P 500, moves 2 or 3 Standard Deviations to the downside, as perceived by traders buying far OTM puts in SPX. Given that a high SKEW reading means OTM puts are being bid up, should we be selling puts (and thereby selling SKEW) when the index is high? We decided to construct a SKEW rank. Similar to IV Rank, SKEW rank measures how high or low current SKEW is relative to the past year.

The Study:
  • Used S&P 500 (SPY) and Skew Index (SKEW)
  • 2012 to Present
  • Compared Selling 45 DTE 10 and 16 delta Puts in SPY:
    • When SKEW Rank > 50%
    • When SKEW Rank < 50%
  • Managed all Trades at expiration
Results:

Both the 16 and 10 delta puts show a P/L advantage for the rank being above 50. This relates to selling high implied volatility as measured by IV Rank.

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