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Don Kaufman here. |
It's Christmas Eve, the markets are closing early, and the holiday cheer is in full swing—but let's not sugarcoat it. |
While everyone else is sipping eggnog and staring at their screens, hoping for a holiday miracle, I want to give you something way better: a real edge in your trading. |
Today, we're diving into one of the market's best-kept secrets: skew—the silent assassin draining your profits if you're not paying attention. |
If you've ever wondered why bullish trades feel outrageously expensive while bearish ones seem like they're on clearance, you're not alone. |
This isn't random—it's skew, and understanding it can be the difference between chasing bad trades or dominating the market like a pro. |
So, grab some coffee—or maybe a spiked eggnog—and let's unwrap the gift of smarter trading. |
What Is Market Skew, and Why Should You Care? |
Think of skew as the market's invisible hand, quietly reshaping the price of options. |
It's the reason call spreads are burning a hole in your wallet while put spreads feel like a steal. |
And here's the kicker: skew isn't just a pricing quirk—it's a direct reflection of market sentiment and big money moves. |
When calls are overpriced, it means traders are piling into upside exposure, driving premiums higher. |
Meanwhile, puts might look cheap, but that's where hidden opportunities often lie. |
Here's where most traders get it wrong. |
They see a bullish market and jump headfirst into expensive call trades without stopping to ask: Is this really worth the cost? |
Understanding skew is like finding the cheat code to avoid overpriced trades and capitalize on better opportunities. |
Today's Options Pricing: A Case Study |
Let's break it down with a real-world example. This morning, I compared two trades: |
A bullish call spread on the S&P 500, $5 wide, slightly in the money, cost $3. A bearish put spread, also $5 wide and slightly in the money, cost just $2.
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Here's the twist: both trades had the same probability of success. But the bullish trade was 50% more expensive. |
Why? Skew. |
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The market is charging a premium for upside trades, while bearish setups are being sold at a discount. |
If you're not factoring this into your strategy, you're overpaying—and possibly setting yourself up for failure. |
Spotting and Leveraging Skew in Real-Time |
Here's how you can stay ahead of the game: |
Compare Call and Put Pricing
Before placing a trade, check the cost difference between bullish call spreads and bearish put spreads. If calls are significantly pricier, think twice and consider a bearish setup or a more creative strategy.
Monitor the SKU Index
The SKU Index measures the distortion in option pricing. A high SKU means calls are overpriced relative to puts—use this to favor bearish or neutral strategies.
Use Ratio Backspreads
When bullish trades are too pricey, switch to call ratio backspreads. They let you stay bullish without overpaying and even offer the chance to collect a credit if things don't go your way.
Avoid Expensive Butterflies
High skew makes bullish butterflies painfully expensive. Consider bearish or neutral butterflies instead—they're often far more cost-effective and align better with distorted pricing.
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Why Skew Matters to You |
Here's the deal: if you're not accounting for skew, you're trading on hard mode. Skew isn't just some theoretical concept—it's the market's way of showing you where money is moving and where the real opportunities lie. |
Big players aren't jacking up call prices for fun. It's about positioning, hedging, and exploiting sentiment. If you can decode these moves, you'll stop overpaying for trades and start riding the waves smartly. |
Today's market was a perfect example: bullish trades were overpriced, while bearish trades offered better risk-reward ratios. Skew is the key to spotting these opportunities and avoiding costly mistakes. |
The Big Take |
Let me leave you with this: the markets may close early today, but the lessons you learn now can set you up for a winning 2024. Skew is the silent force that shapes your trades. Learn to spot it, and you'll stop chasing overpriced setups and start capitalizing on hidden opportunities. |
Don't let another day—or another holiday rally—go by without understanding why your trades cost what they do. |
Decode the skew, and you'll stop reacting to the market and start anticipating its moves. |
For just $7, you can unlock 30 days of TheoTrade—the strategies, the tools, and the support you need to make sense of markets like this. |
Click here to join now. |
To your success, |
Don Kaufman |
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