What the Skew Tells Us

Feb 3, 2014

EDITOR’S NOTE: We are pleased to have Catherine Clay, CEO of Livevol, as guest editor of JLN Options all this week.  We welcome her opinions and the information and look forward to her insights the rest of the week.

It is a genuine pleasure to be guest editing the John Lothian Newsletter. I’m not sure how many West Coasters get this opportunity, and I am honored.

The timing of my engagement is also fortuitous. Rather than be the editor when the markets are in a slow, steady rise and the VIX trapped in a tight range between 12 and 14, I start the week with the VIX at 18.41, the Dow down 5.4% for the month, and the markets jittery. May we live in interesting times, as the saying goes.

So far, 2014 has already been far more interesting than 2013, with higher option volumes, greater sector variance, serious capital flight from emerging markets, and more trading opportunities—to mention a few general trends.

Those of you who know Livevol know we are all options, all the time. We pride ourselves on giving our clients timely and meaningful information extracted from the options marketplace. In times like these, the demand for such information grows. So I thought I’d start the week off by sharing some skew information.

Below is a table showing the stocks with the highest and lowest skew, comparing the 25-delta put with the 25-delta call in the March 22, 2014, expiry. The difference between the implied volatility of the equidistant put and call can indicate nervousness if the skew is high (i.e., if puts are expensive relative to calls) or optimism if the skew is low or inverted (i.e., if calls are expensive relative to puts).

 

STOCKS WITH THE GREATEST AND LOWEST SKEW (as of January 31, 2014)

Stocks with Expensive Calls

IV of the Call – 25 Delta

IV of the Put – 25 Delta

 

Stocks with Expensive Puts

IV of the Call – 25 Delta

IV of the Put – 25 Delta

UNG

60.4

45.8

 

JCP

87.4

119.9

ALU

72.9

59.6

 

HLF

72.7

92.2

BKS

63.0

50.3

 

YRCW

80.1

98.2

ARNA

86.5

81.5

 

QCOR

63.8

79.7

IRM

59.2

54.1

 

MCP

70.6

85.7

CNP

34.8

30.2

 

NBG

52.9

64.3

FDO

33.8

29.7

 

MBI

55.9

64.5

Given the type of winter most of the country has experienced, it’s not surprising to see UNG (United States Natural Gas Fund) at the top of the expensive calls to puts comparison. And, given the well-publicized losses at JC Penny, it’s also not surprising to see that stock at the top of the expensive puts column. Clearly, investors are optimistic about energy needs, less so about semi-discount clothing and housewares.

To be sure, the options market can get it wrong. But as a collective representation of sentiment from all participants, the options market often gets it right – sometimes with uncanny accuracy.

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