Avoid S&P 500 collars due to expensive skew
The guest argued that executing three-month 95-105 collars on the S&P 500 is currently bad value because the volatility skew is excessively steep.
The argument
The risk reversal index is in the 97th percentile over the last three years, meaning puts cost 70% more than calls. The guest suggested that investors should buy the 95-80 put spread for protection but avoid selling the 105 call at depressed implied volatility levels (around 11).
The thesis, stress-tested
✓ What validates it
- ✓A flattening of the S&P 500 volatility skew
- ✓The risk reversal index reverting to historical means
▸ Risks discussed
- ▸A sudden market rally could make the unhedged upside call sale look like missed yield
- ▸An abrupt market crash could make a full collar more protective than a simple put spread
Hear it yourself
"Let's also remember at the same time that price does not equate to value as we will lean on in number three, our discussion of carry. Secondly, the three month 95% put vol is high relative to the three month 105% call vol."
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