What Equity Option Traders Can Learn From Commodity Options

Friends,

GME share price started the month around $11. On Friday May 10th, it closed $17.46. Monday it was about 80% to $31. Tuesday it climbed >50% closing at $48.75 before it would give back over half its gains just as quickly.

In a twitter thread @DeepDishEnjoyer, a former market-maker, called attention to what happened with the July expiry $10 strike put — despite a huge rally the put went up in value. Obviously implied volatility exploded.

Let’s follow along in the thread:

This is quite odd from a first principles perspective. GME closed 17 handle on Friday. Today it meme squeezed up because of Roaring Kitty. A basic model is: it continues meme’ing - then these puts expire worthless or the meme ends and we go back to where we were at at Friday. But note that you could have sold these puts at 75 cents today even though they closed in the 50s on Friday!!!! They should be actually be worth *less* since there is no state of the world where downside vol increased.

He continues:

That's easily anywhere from 20-40 cents of EV on these puts. And indeed that's where these puts landed now. So why does it happen? Well, market makers don't pay a large amount of attention to the wings of their vol surface. ATM implied vol got correctly bid, but they moved the...rest of the surface in parallel EVEN THOUGH THAT MAKES NO SENSE IN A SCENARIO WHERE A STOCK MEME GAPPED UP. Again, vol follows fairly two discrete paths that are intimately tied to stock price - vol is high when the stock is memeing, vol necessarily dies down when it stops.

At the money implied vol should increase. But the strike vol of the 10 strike put should not be massively increasing as the probability of going *below* 10 has not increased today from yesterday, while the options market is implying it has.

So did the IV on those puts go up “too much”?

Settle in. Lots to discuss.