As you can see, based on CVOL skew levels, the options market began pricing in a move toward a “less steep” inversion of the U.S. Treasury Yield curve in late July. Over the next couple of months, the inversion of the 2s/10s and 2s/30s did, in fact, decline by about 30 basis points.
Then on Oct. 3, the 10-year note yield moved above 4.8%, and the 30-year bond moved above 4.9%, reaching those multi-year highs and flattening the yield curve even more.
To be clear, a skew shift will certainly not always predict a price move in the underlying, and there are many dynamics involved in options pricing. For example, sometimes we see an upward move in implied volatility after a period of depressed levels simply because the market might perceive relatively lower levels as an opportunity to buy “cheaper insurance.” However, the scenario described here is a good example of what can be learned from analyzing options pricing, particularly using the CVOL tool.
Of course, the CVOL tool also represents a source for options traders to explore trading opportunities. With both intraday and historical values available, traders can use it to identify short term changes in volatility, skew and convexity, as well as diversions from historical normal levels, similar to what we’ve seen recently in the treasury market.
Image and article originally from www.cmegroup.com. Read the original article here.