Many things have collapsed this year but for vol traders, the most striking collapse has been the one of S&P500 skew. Skew used to be either expensive or very expensive (especially in 2021), which made hedging downside risk extremely costly (see the post “The temptation of the 95% Put”), and the systematic sell of puts attractive.
In Q2 2022, S&P500 skew collapsed. Several reasons can be given: the market was less leveraged, traders were “ready” for the spot sell off, some structured products issued in big size changed the dynamics of spot/vol and spot/skew.
At current levels, skew may not a “good” sell anymore and traditional yield enhancement strategies should be reviewed!
Graph : Over 12 years, the 3-month Skew (expressed as absolute vol difference between the 25d put and atm) has never been so low compared to the ATM vol.
