Options Skew Explained: Why Most Traders Buy Too Late

0:00 question is can you talk a little bit about general value of seeing skew what decision making it might help with uh and Matthew Ward what's up thanks for joining us all right so uh we talk a lot about skew and VA and why is that important and let's talk about that in the context of what's happening today um let's just rewind back a little bit because we'll we'll just loop general volatility into this conversation uh and show how we're navigating ating. Um so, uh implied V has a couple of different features, right? There is the overall level of V. Uh implied V is elevated or it is uh decreasing, increasing, decreasing. Uh it's rich or cheap,

0:46 right? A lot of those terms are comingled. So, [clears throat] that tells you how high or low the general level is of volatility. You can think of it like what is the level of the ocean? Uh tide goes up and tide goes down. And then you have the skewess, right? Skewing towards puts or towards calls. And so there there are two features that we're generally going to typically mention is going to be the skewess. Are people buying calls? Are they buying puts? Are they selling calls? They selling puts. And that changes the shape or the surface, the volatility surface. So if you imagine like a tsunami creates like a wave, right? There's [clears throat] the overall level and then they're sort of like, well, what is the wave height relative to sort of the stable low? Um so there that is sort of the second thing you want to look at and we can talk about the compass and how

1:31 that matters but let's just talk about in the context of what's happening now and how we can use it. Um we and this this ties into I usually start this with a little bit of market background. Um last week or I guess it was about two weeks ago now on the 7th 8th 9th we started saying look because correlation has hit lows on this on this chart right corore 1m is a SIBO correlation index. We said this in and of itself is enough for us to want to buy puts because of the risk embedded in this. What does this mean? This means that single stock va is really elevated. So Google, Apple, Microsoft Nvidia Netflix Netflix whatever, those single stock vaults are really expensive, right? The level of that ball is really expensive relative

2:17 to uh index or SPX vault, right? So that's talking about the spread between those two. And so I know I'm kind of off track a little bit from what you asked JBR, but I will be coming back around to you. So the first thing I would note here is eight is just this line in the sand that we draw. But what is this telling us? This is telling us that on a relative basis, S&P implied V is very cheap, right, relative to single stock V. And and so you can look at single stock V or index ball in isolation, right, by itself. Or you could do sort of a pair-wise comparison. In this case, again, looking at stocks versus index. So when we start today, generally when this index goes below eight, we start buying puts and one month, two month puts as we got to put those in the

3:03 kitty, keep track of them. Maybe we don't go full bore into a riskoff situation, but what is this telling us? The extreme, there's an extreme now between single stocks and index stuff. When does this usually occur, right? When does this hit these extremes? When people are bullish, do they tend to buy single stock calls? Uh when when there is bullishness, right? And then if the world's going to end, what do you do? You generally buy index puts. We talked a lot about a lot this about this a lot in the past of when you feel like the equity market is stable what do you do you don't go like let's buy more spies you go like how can I beat this thing let's go buy SanDisk let's go buy Google let's go buy Tesla whatever it is right you want to outperform the market because you feel like equities is such a stable environment it's like in crypto

3:48 it's like do I own crypto at all right now or not well if crypto is going up 30% a day then it's like let's buy the memecoin let's buy fartcoin let's buy whatever uh you know you go out on the spectrum um in terms of risk. Whereas if we're worried about do we own cash or bonds, then you're not sitting there thinking like I want to own Tesla. If you're if your discussion is should I be in equities at all versus bonds, you're not going to be like should I be in Tesla versus bonds? Like it doesn't really work like that, right? So okay. So why does that matter? How's this all really disguised?