The Saturday Spread: Leveraging a Lesser-Known Signal to Evaluate Genuine Market Risk

Market Shifts and the Power of Volatility Skew

Normally, I put together this column on Saturday mornings, but an unexpected heat wave in my area delayed my writing until later in the day. No matter the time, the financial markets have experienced significant shifts that deserve attention.

As someone who closely monitors unusual options activity, I find that this type of screening—along with the outlier trades it uncovers—often provides some of the most actionable insights. For instance, when there’s a surge in call option volume, it’s commonly interpreted as a sign that the underlying stock might be poised to climb.

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While these signals can be telling, interpreting unusual options activity isn’t always straightforward. These screeners come with inherent uncertainties that require a deep understanding to decode. Even with expertise, it’s tough to know the true intent behind a trade, since there’s no direct record of the trader’s motivation.

Volatility skew, however, offers a different perspective. By definition, it represents the overall pricing pressure across the selected options chain, highlighting how the market as a whole is managing risk, rather than focusing on isolated trades.

Unusual options activity can certainly add context to an analysis, which is why it’s frequently referenced by market experts. Still, building a case based solely on these trades is challenging. In contrast, volatility skew aggregates the most influential options trades, visually mapping where sophisticated investors believe the greatest risks lie for a given stock.

Below, you’ll find two struggling stocks where the volatility skew hints at potential opportunities for those willing to go against the crowd.

Sunrun (RUN): A Surprising Signal Amidst the Selloff

Given the recent heat wave, it’s fitting to discuss Sunrun (RUN). The residential solar company suffered a steep decline after its latest quarterly earnings, with a disappointing outlook causing shares to plunge over 35% in a single day. Despite this, institutional investors appear relatively unfazed.

Examining the volatility skew for options expiring April 17, implied volatility for both calls and puts near the current price remains steady, indicating little urgency. On the lower strike side, the skew is flat—a subtle but telling sign. If seasoned options traders were truly alarmed, we’d expect to see increased demand for protective puts, but that isn’t the case.

Instead, the skew on the higher strike side shows positioning for potential upside moves. This suggests that options traders are more concerned about missing a sharp rebound in RUN than about further losses.

With the Expected Move calculator projecting a top price of $16.06 for the April 17 expiration, the 14/15 bull call spread for that date stands out. For a $40 net debit, traders are targeting a move above $15 by expiration, which could yield a $50 profit—a 150% return.

Duolingo (DUOL): Contrarian Opportunity in a Beaten-Down Name

Learning a new language can be transformative, but Wall Street remains focused on financial performance—and Duolingo (DUOL) recently fell short. After its Q4 earnings, the stock dropped sharply, and the Barchart Technical Opinion indicator gave it a 100% Strong Sell rating.

Should investors be worried? The data suggests otherwise. For options expiring April 17, the volatility skew near the current price shows no rush to hedge. Like Sunrun, the left side of the skew is flat, while the right side rises in a measured way.

There’s no clear signal that options traders are betting heavily in either direction. Still, the emphasis is on upside risk: institutional investors seem more concerned about missing a potential rally than about further declines.

This contrarian view is supported by the fact that DUOL has a high short interest—22.01% of its float, according to Fintel—making it a candidate for a short squeeze.

For those seeking a calculated approach, the 100/110 bull call spread expiring April 17 could be appealing. The Expected Move calculator points to an upper target of $119.62, suggesting the $110 strike may be conservative.