Why do different SPY expiration’s have different volatility?

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SPY expirations are different because of the weekend

The volatilities of SPY expirations look different every term because they sit in different spots in relation to the weekend.  Mostly what we see is implied volatility (IV) going up over time as the value of volatility with more time gets more expensive.  All of the Monday, Wednesday and Friday options trade slightly differently because the Weekend Effect has a larger impact on the volatility short term.

Why do Monday SPY Expirations have such a low volatility?

Monday options have 2 of the 3 days as a not-trading weekend day.  Those days have some value but the reality is the market does not trade on Saturday and Sunday so the liquidity provider will discount the time and that shows up as lower volatility.  Implied volatility is recorded on today’s trade date so “rolling” time forward will depress option prices and IV just sees a lower option premium and that get a lower IV number.  When the market heats up, the options are “reflated”.

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SPY Expiration’s showing different volatilities

Keep an eye on serial SPY expiration cycles

As I was looking this morning I saw the SPY Nov15 sigma get to 10.00% and stop.  Sigma is an average volatility for the expiration cycle that looks at calls and puts.  Monday and Wednesday SPY expiration can get to single digits in IV faster than the serial cycle because Friday has 5 of 7 trading days per weekly cycle.  A break into a single digit for volatility on a Friday weekly cycle is usually bullish as the put demand short term dries up.

As SPY volatility drops think about time spreads in the SPY expiration cycles

We got close to single digit volatility in the SPY Nov15 cycle and the big question is can we get and stay there.  The rally has been straight up so there is ample opportunity to “backspread” SPY using time spreads.  That means we use time to pay for the premium in our options.  It is a little tricky but something traders can learn in our Platinum Course.

Disclosure: SPX options, VIX options, SPY options

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