Skew Shape and How it Affects Options

Those are nice charts to look at but I am not sure how this would help anyone make a trade decision based on these charts
Maybe I am just thinking too far ahead
The reality is that the Individual volatility is changing all the time so by the time you make a graph and plot it out and maybe try to make a trade based on that the volatility has already changed Even if you were able to make some trade based on the graph there could be some news announcement or event that would make the market gap down or up so you could win or loose depending on if you are on the same direction that the market is going in
I am not saying to give up on it I just don't see the end goal for this
I understand it's just a concept but what is the purpose of all this effort ?

When Wayne showed those points on the graph where you could possibly take advantage of the skew those were hundreds of points apart Most BWB trades are in the 50-75 point range which is probably not enough to make any difference as far as the skew is concerned in my opinion
I think what would be more interesting to find out if there is some kind of relationship between one skew and another and find an optimal entry for a diagonal based on that
Just my opinion
 
Starus1, i think you do think farther ahead that those graphs imply.
This mini-study was done to answer, or rather to examine how big impact 1 p vol increase have on option price. This is done in model space alone.
For this exercise Jim applied flat IV - no skew (like it was before '87).

Then on sliders you can pick dte and observe how prices change for 1p IV change (or more if you wish) in relation to how close strike is to atm. Ater playing for a while some conclusions should jump at you.
You can deduct all of that and don't need this tool but is is smth to play with and can solidify tour understanding of 'things'.
Unfortunately I can't make it public for the simple reason I do not know how. Maybe we can work on something with Tom to put it up on Aeromir site somewhere.

This is kind of knowledge one should be familiar with when dealing with IV graphs.
 
status1 said:
Those are nice charts to look at but I am not sure how this would help anyone make a trade decision based on these charts
Maybe I am just thinking too far ahead
The reality is that the Individual volatility is changing all the time so by the time you make a graph and plot it out and maybe try to make a trade based on that the volatility has already changed Even if you were able to make some trade based on the graph there could be some news announcement or event that would make the market gap down or up so you could win or loose depending on if you are on the same direction that the market is going in
I am not saying to give up on it I just don't see the end goal for this
I understand it's just a concept but what is the purpose of all this effort ?

When Wayne showed those points on the graph where you could possibly take advantage of the skew those were hundreds of points apart Most BWB trades are in the 50-75 point range which is probably not enough to make any difference as far as the skew is concerned in my opinion
I think what would be more interesting to find out if there is some kind of relationship between one skew and another and find an optimal entry for a diagonal based on that
Just my opinion
Click to expand...
This is one of the highest viewed forums on Aeromir right now, wow! You are absolutely right about the spread being too wide in the presentation. It was hard for me to get the illustration across with just a small spread relative to the size of the skew. One way to look at it with smaller spreads is that the cost of capital is less than the giant ones used in the presentation, leading us to increase the number of contracts, amplifying the net effect of skew on the smaller spread. This will still lead to the skew massively affecting a trade set up and outcome. One way that I look at skew is to determine if the skew shape is on the lower end at the start of the trade in respect to the percentile for historical assumptions of a trade system's data set. If I have a trade that tested/performed fantastic with a particular skew over a data set and the skew is at its lower percentile and that correlates to diminishing statistical wins for my trade system I tested. Then I need to reduce risk or not trade at all (using a position size risk calculation). In a nutshell this is what the presentation was about. Taking a "trade system" we use...collecting skew shape and slope in a environmentally universal way...measuring the correlation to the "trade system"...using that information to reduce risk netting us better return/risk allowing us to increase returns based on a fundamental relationship. I use similar principles in The Sleep Well Portfolio even though it isn't options based. This will mean something different for every trade setup...Butterfly, condor, ATM, OTM, Put side, Call side, Asset to be traded. This is why I didn't get into the specifics of one type of trade. Tim and I will present how it affects Tim's trades and show the work that we went through to get to our conclusion in the near future (Januaryish).
 
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jim leahy said:
marcas and i worked on a script (marcas did the hard part) to plot some graphs to visualize the effect
of a 1 point skew on puts, over a range of implied volatility and days to expiration. the script needs a
public server to enable interactive use so i just took a few screen shots that should give you a good
idea of the results. the assumption is the at-the-money strike is 3600 and the skew offset is 1 point.
this shows the difference between, say, a 3500 put at an iv of 20, and that same strike with an iv of 21.
the red curve indicates the higher iv. the iv and the dte used in the plot can be read from the dot
on the sliders above the graph.


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This is beautiful! I would love to play with this.
 
jim leahy said:
marcas and i worked on a script (marcas did the hard part) to plot some graphs to visualize the effect
of a 1 point skew on puts, over a range of implied volatility and days to expiration. the script needs a
public server to enable interactive use so i just took a few screen shots that should give you a good
idea of the results. the assumption is the at-the-money strike is 3600 and the skew offset is 1 point.
this shows the difference between, say, a 3500 put at an iv of 20, and that same strike with an iv of 21.
the red curve indicates the higher iv. the iv and the dte used in the plot can be read from the dot
on the sliders above the graph.


View attachment 2908 View attachment 2909

View attachment 2910 View attachment 2911
Click to expand...
Library presentation download link, pls? Thx
 
if you're referring to wayne's presentation, i don't have a link, but it was in the beginner and small account trading group in early december 2020, i think. maybe wayne has the link.
 
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