My understanding is that SPY options normally have higher implied volatility than do options on SPX, but at the moment it appears that IV (and prices) are higher for SPX, at least for immediate timeframes (ATM e.g. Nov 4 expiry). Does anyone know why this would be the case?
What is your data source? Please post what you are referencing. IFF your source is indicating different IIV for ATM between PUTs and CALLs for SPX, this may be the source of confusion!
I haven't looked at the numbers (it being the weekend), but if the SPY options have a higher IV than the SPX ones, then there would be a arbitrage opportunity. Eg. sell 10 of the SPY options and buy 1 of the same strike/expiry SPX option.
This doesn't appear to be true, Vols are more or less equal as of close Friday. Here are vols calculated off of options closing mid and underlying close: BASE ,EXPIRY , ATMIV, D10PUTIV SPXW ,20201104, .413202, .577516 SPY ,20201104, .416212, .584927 And here are vols calculated off of options closing mid and underlying closing mid: BASE ,EXPIRY , ATMIV, D10PUTIV SPXW ,20201104, .418737, .59106 SPY ,20201104, .42145, .586358
SPY IV: 39.97% SPX IV: 38.47% I never looked at implied vol on different products (ETF vs Index) as an arb opportunity. My understanding of arb is usually bid/ask spreads or free butterfly spreads, not the implied vol differential on different products. Is this "arb" practical? Can someone really profit off this?
I stand corrected; I was using post-close data from web sites that were erroneous. Today I can see from higher-quality, real-time feeds that the IV is indeed slightly lower for SPX, at least for the strikes I looked at. Mea culpa!
It is due to American vs. European expiry, American expiry having higher IV due to early assignment risk, supposedly. I don't know exactly how much this impacts the IV of these series in practice; the bid/ask spread for SPX does seem a bit wider (due to contract size and/or popularity with retail, perhaps), and that may overwhelm any minor IV deficit in SPX.
That makes sense. Keep in mind that the actual spread on SPX options is generally right off the mid when you put in a limit order, even though the published bid/ask is wider. So if you used that to calculate your IV it might match even closer.