A Skewed Up World

A Skewed Up World

Over the past several months, there's been no shortage of banter about extremes in various "crash" metrics. And no shortage of bad, but unavoidable, jokes, either. Things are "all skewed up," for example. There are a variety of talking points to choose from, and they're all related. The uncomfortable juxtaposition between, on one hand, the high relative cost of hedging drawdowns and, on the other, subdued realized vol, is a continual source of consternation, as is seemingly insatiable demand f
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3 thoughts on “A Skewed Up World

  1. H-Man so when are extremes not extremes? And if your portfolio is getting hammered, that is an extreme event. Does that change your sentiment? I guess it depends for how long and how much the portfolio gets hammered. It would appear that an “extreme event” drives the bus like Covid when vol shot through the roof. So when they say vol will fall in the near future, I guess that is right unless an “extreme event” shows up. There are a few of those on the radar.

  2. Great as always. I have been thinking about this skew view of positioning the last couple of weeks. Upside calls on the SPY into year end are just too cheap compared to puts, everyone buying crash down protection makes taking the other side attractive. If one believes JP Morgan’s target of 4700 by year end is a possibility, a call spread or even a calendar spread using that target into December/January offers a ridiculously good risk reward right now, at least it did yesterday when I placed my bet.

    1. If you were a real man you’d do what we used to call risk reversal trades! Sell puts to finance your call purchases. When the skew is extended, you can buy closer strike calls using what you earn from your put sales.

      Interesting though, wasn’t the skew in reverse not long ago? Weren’t calls in higher demand? That struck me as being more strange.

      The current skew is interesting, but rational. In my ancient mind, anyway.

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