Option market sees a 6% chance S&P 500 drops 10% over next 3 months

The option market is currently signaling a relatively low probability of a significant downturn for the S&P 500 over the next quarter, according to Piper Sandler.

The investment bank estimates a 6% chance of the index falling by 10% within the next three months. While this figure may seem elevated, Piper Sandler suggests it could be even lower at around 5%.

"The so-called risk-neutral distribution (the shaded region) implies about 6% odds on a 10% net swoon in 3 months," they wrote. "Based on an extension of this method, the probability should be 5% (green)."

However, the firm highlights what they see as a more pressing concern: the market appears to be overly optimistic about upside potential. Piper Sandler believes the market is assigning an excessive probability of a 10% increase in the S&P 500.

"The market assigns about 3% odds to a 10% further increase in the S&P, compared to the 'fair probability' of 1%," Piper Sandler noted.

The analysts caution that this overvaluation of upside potential could lead to a correction in the market over time.

Feel ready to dive into details and start finding interesting stocks to invest? Try our AI supported solution InvestingPro today!

Get an extra discount up to 10% by applying the code FTSEINVEST on our 1&2 year plans. Don't wait any longer!

How to buy pro InvestingPro