Market weakening and rate cuts coming? —here's how you get paid TWICE on your puts 💰

SPX options are priced on a forward curve

The underlying SPX value for a year out option is NOT THE SAME as the underlying SPX value for a 0DTE.

Right now you have around $230 between Sep24 and Sep25 - the futures settlements on the CME website give you a quick view of the forward curve by quarter:

https://www.cmegroup.com/markets/equities/sp/e-mini-sandp500.settlements.html

Loosely- this difference is just compounding the spot value (today’s SPX level) by the difference between the risk free (FOMC 5.25%) and the current dividend rate (SPY Div yield 1.26%).

Intuitively, this should make sense— you’re accounting for a basic cost of capital:
with cash you earn a yield but no dividend; and with SPY you receive dividends but no yield.

What happens if the Fed is forced to cut aggressively into a rapidly deteriorating economy?

If the market drops, and rates are cut…

…your long dated puts pay you *twice*

They move broadly with everything else as SPX (spot) sells off,

..and then rate risk manifests when those “risk free” rates get repriced.

Suddenly the forward value of SPX (the value your puts are technically priced on) gets repriced EVEN LOWER, too 👀

Because the “risk free” rate from that relationship above is much lower.

For most of the last 15 years the forwards were INVERTED…
—because rates were non-existent!!

So let’s say your hedge is a 1y out 50d put and the market drops 10%, or roughly 550 points AND rates are aggressively cut ~3%…

Even though the index only dropped 550 points…

YOUR puts are priced against an underlying which fell ~$700 in total $$$
…and likely slid up the skew curve into higher vols 💰

ALL THANKS to the impact of rate cuts on the forwards 🍻