🚨I’ll be live at 3:30 p.m. ET🚨
When will the chop finally end? We’ll discuss that, important GEX in the market and more [tap to join us for Closing Playbook]!
Most traders never find a truly guaranteed trade. I did — and the broker slammed the door in my face before I could execute it. Here’s what I learned and, more importantly, what I did about it.
During a recent live session, I was analyzing a vertical spread on the S&P 500 ETF (SPY) when extreme implied volatility skew made the position appear mathematically incapable of losing at the quoted prices.
Not unlikely to lose… darn near impossible — assuming those displayed prices were executable.
Why the Mispricing Appeared
Traders often talk about an underlying as if it has one implied volatility number. In reality, each strike can carry a different implied volatility. Plot those values across the option chain and you get what traders call the volatility smile.
When demand pushes one strike’s volatility sharply above or below another’s, the resulting skew can distort spread pricing and occasionally create an apparent arbitrage.
Markets aren’t theoretical models — they’re live instruments driven by supply, demand and available liquidity. A pricing model may identify a near-risk-free payoff, but that doesn’t mean a counterparty must accept the necessary prices. The quotes on your screen can move, disappear or prove unavailable when you try to trade them.
That’s exactly what happened here. I submitted both legs as a single spread and got rejected. I lowered my price and tried again. Even at 99 cents — just one dollar of theoretical risk — I couldn’t get filled. The market maker recognized the mispricing and refused to take the other side.
On a highly liquid product like SPY, sophisticated market makers detect these inefficiencies quickly.
How to Leg Into the Trade
A rejected spread order doesn’t always mean the opportunity is gone. It may mean you need to leg into the position instead.
First, buy the long option outright at an acceptable price. Second, confirm the fill rather than assuming the order executed. Third, immediately sell the other option to complete the vertical spread.
Finally, verify the combined debit or credit and make sure the finished position still offers the payoff you identified.
This approach prevents the market maker from evaluating and rejecting the entire package as one obvious arbitrage. But it isn’t literally risk-free: You have directional exposure between fills, prices can move and the second leg may not execute where expected.
Your account also needs enough buying power to hold the first option independently. Broker requirements vary, so know the rules before starting.
These inefficiencies may persist longer in smaller, less liquid names, though wider bid-ask spreads and weaker liquidity also increase execution risk. The real edge isn’t merely spotting unusual skew…
It’s understanding why it exists, confirming that the quoted prices are tradable and executing both legs without letting a theoretical profit become a real loss.
Kane Shieh
Kane Shieh Trading
Follow along and join the conversation for real-time analysis, trade ideas, market insights and more!
Important Note: No one from The TradingPub team or Kane Shieh Trading will ever contact you directly on Telegram.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
P.S. What Wall Street May Be Buying Right Now
Today’s Trade of the Day features Sniper Scalper…
Roger Scott’s approach to identifying unusual institutional activity as it develops.
Rather than chasing stocks after they’ve already made major moves, this framework focuses on finding opportunities when large buyers may be entering a stock and momentum is beginning to build.
Diana will break down the strategy, explain the philosophy behind it and show why Roger uses it to stay focused on stocks attracting institutional attention — all at 5 p.m. ET today!
