Interpreting the SPX curve

What to look at in the SPX curve

Now that we had a 100 handle down day I thought it would be instructive to muse on the SPX volatility curve.  I have put out several TWTR posts on midday curves using Edge Hunter Curve to help traders get a grasp of some of the activity in the Implied Volatility.  Focus on these two things: the slope of the OTM options and rise or decline of the absolute volatility ATM.

How the SPX curve moves in the OTM options

I traded SPX for a year in the mid-90s.  One of the things I learned was that the volatility curve inflects from the ATM straddle.  Put curve slope moveS in a direction up or down and so do the upside call curves.  Each term has a unique curve but back then there were no Weeklys.  In general, but not always, the lower the IV ATM the steeper the curves go OTM.  For instance we were looking at steeper skew just last week into the FOMC with lower ATM volatility.  Today as you can see from chart below that is not the case. 

SPX Aug23 curve midday 08.05.2019 Data from Cboe Livevol

The whole SPX curve can shift up or down

It gets more confusing in that the ATM can shift up or down.  Just a move in SPX will generate a new ATM volatility.  The difference is how “sticky” that volatility is to the new ATM strike.  There are several different types of trades one can generate around these shifts.  When the IV ATM is rising, the vol traders usually think a move is for real and jack up the volatility ahead of the action.

Today’s move was mostly curve flattening

What happened today is the SPX moved so much implied volatility jumped up at each strike relative to the ATM.  This morning the big curve flattening was a tell the market makers were adjusting to a bigger move.

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Edge Hunter Curve

SPX Aug23 curve take midday today. Data by CboeLivevol