Decoding SPY Skew Post-Fed Decision: A Deep Dive
The Federal Reserve’s interest rate decisions often have a profound impact on the markets, and the September 21, 2023, decision was no exception. SPY, the SPDR S&P 500 ETF Trust, experienced a significant 3% drop, marking one of the largest single-day declines in recent history following an FOMC meeting. This blog explores the insights shared in the Market Chameleon webinar analyzing SPY skew and market sentiment after this major event.
What is Skew, and Why Does it Matter?
In options trading, skew refers to the difference in implied volatility (IV) between out-of-the-money (OTM) calls and puts compared to at-the-money (ATM) options. Skew provides a snapshot of market sentiment, reflecting traders' expectations for upward or downward movements.
Following the Fed’s announcement, the skew for SPY options showed a distinct preference for downside protection:
25 Delta Puts: Implied volatility was 19% higher than ATM IV, signaling increased demand for put options as traders sought protection against further declines.
25 Delta Calls: Implied volatility was 12% lower than ATM IV, indicating reduced demand for OTM call options relative to puts.
Key Observations from the Webinar
1. Market Reaction and Historical Trends
Historically, SPY tends to rise the day after an FOMC meeting, with an average gain of 0.3%. However, the September 21 drop defied this trend. This anomaly underscores the importance of analyzing specific market conditions rather than relying solely on historical patterns.
2. Volume Insights: Calls vs. Puts
Despite the skew favoring puts, the webinar highlighted significant call option activity, particularly at the 605 strike price. This divergence suggests a subset of traders anticipated a potential market rebound, reflecting mixed sentiment even amidst heightened downside concerns.
3. Shifts in Implied Volatility
A notable upward shift in the IV curve across all strikes was observed post-Fed decision, with a larger increase in upside calls. This behavior underscores the market’s heightened uncertainty and acknowledgment of potential for significant price swings in either direction.
Decoding the SPY Skew Analysis Tools
Market Chameleon’s advanced analytics tools were instrumental in uncovering these insights. Here’s a breakdown of the features used:
Single Leg Dashboard
Skew Analysis: Calculated by comparing IV of 25 Delta puts and calls to ATM IV.
Volume Trends: Highlighted significant call volume despite bearish skew.
VWAP Analysis: The volume-weighted average price provided insights into trading trends and demand for specific options.
Events Tool
Implied Volatility Insights
Key Takeaways for Traders
Balanced Analysis: Skew analysis is essential, but it’s equally important to consider other factors such as volume trends and IV shifts.
Prepare for Uncertainty: Post-Fed decision volatility often creates unique trading opportunities, as evidenced by the mixed sentiment and unusual volume patterns.
Leverage Analytical Tools: Platforms like Market Chameleon provide the comprehensive data needed to decode complex market behaviors.
Conclusion
The September 21 SPY skew analysis highlights the nuanced market reactions to major macroeconomic events. While skew pointed to a bearish sentiment, significant call option activity and IV shifts painted a more complex picture of trader expectations. By utilizing tools like Market Chameleon, traders can gain deeper insights into these dynamics and make more informed decisions.
?? Access the Market Chameleon Platform for Advanced Options Analytics: Market Chameleon Options Tools
Disclaimer: This blog is for informational purposes only and does not constitute financial or investment advice. Options trading involves risk and is not suitable for all investors. Consult with a licensed professional before making any trading decisions.
