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SPX® Skew in the 99th Percentile High as Downside Risks Rise

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Link to Report: Macro Volatility Digest

WHAT STANDS OUT:

• Following this weekend’s strikes by the US, oil markets remain fairly stable as investors wait for Iran’s response. WTI 1M implied volatility surged to as high as 68% last week before ending the week at 51%. The WTI 1M implied-realized vol spread has halved from a high of 30 pts to 14 currently, as fears of significant oil supply disruption have abated somewhat. Notably, US inflation expectations have barely budged on this latest jump in oil prices, in sharp contrast to the 2022 Russia/Ukraine invasion.
• While the VIX® index has returned to its pre-“Liberation Day” levels, SPX skew is much steeper today as seen in chart below. Despite the same SPX ATM vol level, put vols are now trading 1-2 pts higher vs. April 2^nd while call-side vols have fallen. In fact, SPX skew is in the 90+ percentile highs across tenors, with 3M-6M skew screening as the richest (both in the 99+ percentile highs over the past year). The steeper skew suggests investors are buying hedges as downside risks rise – this is also consistent with the higher SPX put/call ratio we’re seeing (non-0DTE put/call ratio has jumped sharply from 1.57 in May to 1.72 this month).
• SPX implied correlation is another metric that is higher today compared to pre-“Liberation Day”, with 1M implied correlation trading 8 pts higher. As macro risks have risen, stock fundamentals have taken a backseat, with single stock volatility meaningfully lower (VIXEQ in the 21^st percentile low over the past year).

Chart: SPX 3M Volatility Skew (Now vs. April 2nd)

^{Source: Bloomberg}

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