Is SBD supposed to be pegged to $1?

Yes, it is supposed to be pegged to 1 USD. If the price of the SBD goes down then the witnesses have some way to bring it back to 1 USD, but if the USD value of the SBD goes up like now, the witnesses do not have anything to make it come back to 1 USD pegged value. We all can just convert SBD to steem to make our stakes bigger during these times. @laterloser

Why did it go so far from the peg?

Because of the overwhelming investment from the Koreans on upbit, the price increased rapidly in a single day.