Table of Contents

Computing the Put/Call Skew

Put/Call Skew requires the current share price, bid/ask of 2 call options surrounding 110% of share price, bid/ask of 2 put options surrounding 90% of share price to compute. The expiry date is for next monthly expiry, and the bid/ask spread for all 4 options must be below 25%.

Example Computation for MasterCard

In this example, data is pulled from MasterCard (MA) after close on May 14 2020. On that day, in our Put Skew Index, MA had a put skew of 1.911, let’s see how this number is computed from raw data.

Step 1: Computing prices, getting the right strikes

LegendDescriptionComputationOutput
PriceCurrent Share Price$269.16
110% SP110% of Current Share Price$269.16 * 1.1$296.08
90% SP90% of Current Share Price$92 * 0.9$242.24
High Call StrikeCall option immediately above 110% SPStrike above $296.08$300 Call
Low Call StrikeCall option immediately below 110% SPStrike below $296.08$295 Call
High Put StrikePut option immediately above 90% SPStrike above $242.24$245 Put
Low Put StrikePut option immediately below 90% SPStrike below $242.24$240 Put

Step 2: Ensuring options pass liquidity checks

OptionExpiryBidAskAsk/Bid
$295 Call6/19$2.64$2.932.93/2.64 ~= 1.11
$300 Call6/19$1.65$1.971.97/1.65 ~= 1.19
$240 Put6/19$4.30$4.604.6/4.30 ~= 1.07
$245 Put6/19$5.20$5.755.75/5.20 ~= 1.10

The liquidity check requires Ask/Bid of all 4 options to be below 1.25. If any are above 1.25, they are excluded from Put/Call Skew index. Stocks that barely make the liquidity cut off may enter and exit the Put/Call Skew index multiple times per day.

Step 3: Computing option midpoints

OptionComputationMidpoint price
$295 Call(2.64 + 2.93)/2$2.785
$300 Call(1.65 + 1.97)/2$1.81
$240 Put(4.3 + 4.6)/2$4.45
$245 Put(5.2 + 5.75)/2$5.475

The midpoint price is taken as the price for that option.

Step 4: Interpolated Price

OptionComputationInterpolated price
$296.08 Call2.785 – (2.785-1.81)/(300-295) * (296.08 – 295)$2.5744
$242.24 Put4.45 + (5.475-4.45)/(245-240) * (242.24 – 240)$4.898

Step 5: Calculate Skew

CategoryRequirementSkew
Call Skew10% OTM Call Price > 10% OTM Put PriceN/A
Put Skew10% OTM Put Price > 10% OTM Call Price$4.898/2.5744 = 1.903

If the Put price is higher, the stock has a put skew. If Call price is higher, the stock has a call skew.
In this example of MA on May 14 2020, we manually computed Put skew with a result of 1.903 using the end of day data.
There’s a slight disparity to FDscanner’s computed 1.911 because the exact time we used to retrieve option bid/ask is slightly different.

Conclusion

Result for MasterCard May 14 2020:

Manually Computed Put Skew: 1.903

FDscanner’s Put Skew: 1.911

Close Enough