Singles Skew Up
Structured products on US underlyings have been mainly written on the big tech favourites that also happen to be (or used to be) the largest components of S&P500 (Apple, Microsoft, Amazon, Alphabet, Meta, Netflix etc..). The low volatility regime that prevailed in the previous years meant that those stocks were usually combined into worst of structures to generate attractive coupons.
The performance of those products and the potential autocall event are driven by the worst performer amongst the basket, usually made of 3 or 4 stocks. Given the performance of the tech sector since December 2021, those structures are performing poorly and there is no autocall event. No autocall means that there is no money freed up for reinvestments in those same structures. As a result issuance volumes are down massively this year and the corresponding hedging activity too.
In particular, the systematic selling of OTM puts to hedge new issuance on single names autocalls has slowed down a lot. The pressure on skew has disappeared and we can see the skew on singles coming up (see graph)
S&P500 Skew Down
As written in previous posts, the S&P500 skew has underperformed. The performance of SPX was poor but not to the point where dealers had to buy back skew to hedge the index autocalls. Moreover, the large issuance of VolKO puts certainly weighted heavily on short term SPX skew.
Consequently, we have a story of two skews: S&P500 skew down, Single names Skew up.