Skew Shape and How it Affects Options
- Thread starter Wayne
- Start date
That could be a great way to look at it. Another way could be to measure the derivative of rise over run of every option on the chain. It would tell us the overall steepening or flattening and at the same time we would see the inflection points.
You said you didn't want to get into it, but what is your beef with expectancy? Another perspective can be very enlightening!
You said you didn't want to get into it, but what is your beef with expectancy? Another perspective can be very enlightening!
I looked into it and it looks like the dates are not matching up. I was on 2/6/2018 and the picture on tos is on the expiration of the chain I chose for ONE. Here is the TOS lookback...Wayne, I share your approach to trading research. I also try to go my way instead of following somebody else footsteps. Like you, I leave open all the time possibility to be wrong and would love somebody proved me wrong. Just I expect proof to be logical not sort of 'everybody knows'. I sense a lot of misunderstanding about IV graphs and it's meaning out in the public. I can't be sure though because discussion about this is practically non existent. Maybe I struggle with obvious things. So, do not take any critique personally. I hope Jim and Gary can explain more why they object to adding IV. I oppose it as well as a general indicator for structures evaluation, but for different than mathematical reasons. I didn't look at it in the past and I will now. There is a chance that it became quick and dirty, 'good enough' method in _some_ cases.
Re 2018. I'm not questioning your observations. I was simply wonder if you did any statistical analysis of this period. I did not, I do not see a value for my trading in doing that (I'm focused on shorter terms). This days I relay, like you, more on observation and understanding than on statistics. I don't use your '1/2 IV ATM' method. I generally do not like to operate in delta space (having delta or sigma as x axis) but what I be looking at is not only rise but strike distance and atm IV level and try to extract useful info from combination of all of that.
I'm happy that this conversation happens. I hope it will last for a while. I'm convinced that exchange of thoughts is an excellent way to push understanding forward. I want to point out to one issue we should take into consideration if we continue. You use ONE. Gary and I stopped using it while ago, I do not know about Jim. Issue is this:
View attachment 2858
This pic is taken from TOS' On Demand. Take a look at iv levels in comparison to ONE from the pic you posted above. I have about the same values as TOS from my database. I do not know what settings do you use in ONE but iv values are quite different. I do not care about perfect accuracy of iv and greeks (yet another river to jump into) but what we see can not be ignored and should be addressed in the future if we to go beyond conceptual things.
Indeed, my bad regarding dates. I took date displayed on ONE's pic as an actual date for skew. Should pause a bit on it.
Interesting is observation of ATM 'Sagging" as being potentially less bullish. I guess many depends on price action and dte.
BTW, some people here, me including, used to address this point of vol skew 'belly of the curve' (after PD - one of CD/Aeromir members).
Re expectancy. My problem is that it's just another form of expressing BT experience that carries all the BT flaws. I do not say it is bad measure when used properly but it is no-good and deceiving, especially for newer traders, in most cases I heard it being used. I wrote a post about it not so long ago: https://forums.aeromir.com/threads/about-expectancy-misconception.1501/
Interesting is observation of ATM 'Sagging" as being potentially less bullish. I guess many depends on price action and dte.
BTW, some people here, me including, used to address this point of vol skew 'belly of the curve' (after PD - one of CD/Aeromir members).
Re expectancy. My problem is that it's just another form of expressing BT experience that carries all the BT flaws. I do not say it is bad measure when used properly but it is no-good and deceiving, especially for newer traders, in most cases I heard it being used. I wrote a post about it not so long ago: https://forums.aeromir.com/threads/about-expectancy-misconception.1501/
my initial reaction to adding volatilities was based on seeing the slide using negative
volatilities (which don't exist) and multiplying volatilities, which you shouldn't do. but after examining it in more detail, i realized all wayne is doing is comparing the skew of the debit spread vs the credit spread. i have no problem with calculating skews. i haven't seen the
roundtable video so maybe this was explained. i have a few spreadsheets to monitor skew.
today i plotted some spx iv curves and then plotted the skew along the curve. i haven't
analyzed this in detail to see the net impact on spreads. the first plot is the profile of
jan and feb iv for calls and puts, the second graph is the skew of the jan puts, sampled at a
particular time during the morning. there's definitely a lot of skew differences along the curve.
i assume the goal is to minimize the cost of the debit spread and maximize the price of
the credit spread.
volatilities (which don't exist) and multiplying volatilities, which you shouldn't do. but after examining it in more detail, i realized all wayne is doing is comparing the skew of the debit spread vs the credit spread. i have no problem with calculating skews. i haven't seen the
roundtable video so maybe this was explained. i have a few spreadsheets to monitor skew.
today i plotted some spx iv curves and then plotted the skew along the curve. i haven't
analyzed this in detail to see the net impact on spreads. the first plot is the profile of
jan and feb iv for calls and puts, the second graph is the skew of the jan puts, sampled at a
particular time during the morning. there's definitely a lot of skew differences along the curve.
i assume the goal is to minimize the cost of the debit spread and maximize the price of
the credit spread.
Jim, I hope , if more traders are interested in skew topic, we can _discuss_ and 'normalize' couple points regarding looking at and analyzing graphs.
I know you do a nice job monitoring skews. I'd like to hear, not necessary right away, what are you looking at and, most important, how do you apply skew info in your trading (I'm not asking about trade-secrets ).
Did you try to normalize skew steepens to dte? I suppose it is easier to spot oddities this way. Other matter I want point out (without diving in) is having separate call and put skews. I see couple of traders and brokers doing so.
_If_ we are interested, maybe we can sketch some schedule or list of topics to discuss not to jump chaotically form one subject to another.
I'm not sure if Tim is planning to keep skew topic on his TG meetings.
I know you do a nice job monitoring skews. I'd like to hear, not necessary right away, what are you looking at and, most important, how do you apply skew info in your trading (I'm not asking about trade-secrets
).Did you try to normalize skew steepens to dte? I suppose it is easier to spot oddities this way. Other matter I want point out (without diving in) is having separate call and put skews. I see couple of traders and brokers doing so.
_If_ we are interested, maybe we can sketch some schedule or list of topics to discuss not to jump chaotically form one subject to another.
I'm not sure if Tim is planning to keep skew topic on his TG meetings.
I was able to finally take a look at the presentation after it was posted in the library late
I can't say I got much out of it
It would have been more interesting if there was some actionable trades presented otherwise it is just a concept
I am not sure if there was any difference in the skew before the crash in OCT 2018 that could have predicted the price drop or somehow take advantage of it
There are other trades that could have been made (more directional) if there was a way of knowing in advance which way the market will go
Another problem in 2018 was that SPX was going mostly in one direction up so the butterfly would always had to be adjusted to keep from loosing on the upside until October
What is the takeaway from this analysis ? Is this just something to look at or can some trade be made based on the skew shape ?
What if the skew changes after you place the trade ? Do you adjust based on the IV ?
I can't say I got much out of it
It would have been more interesting if there was some actionable trades presented otherwise it is just a concept
I am not sure if there was any difference in the skew before the crash in OCT 2018 that could have predicted the price drop or somehow take advantage of it
There are other trades that could have been made (more directional) if there was a way of knowing in advance which way the market will go
Another problem in 2018 was that SPX was going mostly in one direction up so the butterfly would always had to be adjusted to keep from loosing on the upside until October
What is the takeaway from this analysis ? Is this just something to look at or can some trade be made based on the skew shape ?
What if the skew changes after you place the trade ? Do you adjust based on the IV ?
Thanks for your feedback on the presentation. You hit the nail on the head with it being only conceptual. The presentation was to bring up the subject of skew and see how it effects the risk of trades that are "market nuetral". One of the main considerations a hope people could take away was that there is a variable effecting credit selling strategies that is rarely, if ever looked at. If any options trader were to look at their own result and collect the skew data in a form that makes sense and is normalized they might conclude a correlation to decreases probability or even higher volatility in their results and be able to take action accordingly to increase or decrease risk at the start of the trade.
Great question about "What if the skew changes after you place the trade ?", Pending how the skew is measured and the structure it can give the trade a boost or a loss. For example if the trade is a opposing credit spread trade and the skew across the trades strikes sags we would see a profit over that period.
I am not sure if there was any difference in the skew before the crash in OCT 2018 that could have predicted the price drop or somehow take advantage of it
The skew was gross in many ways for credit spreads. If we look at it similar to what I presented and for a while leading up to the crash we could say " risk is too high for the credit being received." and it would have kept us out of "market nuetral" trades that were mostly losers for that period or were forced to be adjusted with extreme risk.
The presentation was not an attempted to take advantage of skew but more of a risk measure. For example if we can derive the skew is -.5 and we have seen in history that market nuetral credit spreads tend to have higher gamma profiles during times of skew below -0.5 we could decrease capital risk or even not trade if expectancy is negative during those time. The reason I did not bring this up is because typically if there is a trade example we can get hung up on the trade and not the variable in question.
That is true but I could tell that from the premium received at a certain distance from the ATM when trading put credit spreads
I theory I could set up a trade to have positive or negative volatility if I only look at the volatility numbers but that is not going to be a good trade in reality
Another thing is looking at the IV numbers at the EOD may be easy to make the calculations but when the market is moving around by the time you record each IV and make the calculations the IV has changed and possibly making it more or less negative than the initial calculation
The very reason why you are saying "I could tell that from the premium received at a certain distance from the ATM when trading put credit spreads", was the skew effect on the spread you were modelling. Its just another way to measure it. Looks like you already have a system for saying the credit received is too little and the risk premium is imbalanced. That most likely kept you in good standing during most of 2018 and some recent times also. Its always good to look for an edge when it happens as well so knowing that we can see it in skew. My hope is that it might jog the minds of some smart people here to come up with something cool and worthy of sharing. Tim and I are putting together some data now that we have introduced the concept and I look forward to see what else anyone wants to share.
I'm glad to hear about future of IV talks. When is new meeting scheduled? I will attempt to participate live. Not being a smart one, I can share something from my approach (just I need to take over some meeting time).
Wayne is correct about premium for OTM spreads being a form of skew probing. I use it myself as well.
Wayne is correct about premium for OTM spreads being a form of skew probing. I use it myself as well.
in my mind, this is a much more intuitive approach to understanding skew. the way i learned it is that
when skew is high, puts are expensive and put spreads are cheap. i don't think about it as buying or
selling volatility, i think of it as buying or selling premium.
By looking at prices of OTM puts you monitor IV levels. This is different from the skew.
You are right about' questioning "buy low IV and sell high IV". This guideline is only partially true. Premium must be considered as much as IV level or more.I've seen couple traders mentioning it but none fully explained boundaries, caveats etc. I suppose some of them just repeat what they were told without pausing for a moment.
Unfortunately meeting is postponed.
You are right about' questioning "buy low IV and sell high IV". This guideline is only partially true. Premium must be considered as much as IV level or more.I've seen couple traders mentioning it but none fully explained boundaries, caveats etc. I suppose some of them just repeat what they were told without pausing for a moment.
Unfortunately meeting is postponed.
after thinking about this discussion i got curious: what is vol skew actually worth?
i ran a few theoretical calculations for some spx out of the money put spreads, 50 points wide, using
the same volatility and then using a 1 point skew, all at 3 different vol levels. the results are in the
below spreadsheet capture. the spread price isn't much different as the volatility increases
but 1 point of skew makes a fairly big difference. fwiw.
i ran a few theoretical calculations for some spx out of the money put spreads, 50 points wide, using
the same volatility and then using a 1 point skew, all at 3 different vol levels. the results are in the
below spreadsheet capture. the spread price isn't much different as the volatility increases
but 1 point of skew makes a fairly big difference. fwiw.
Hi, everyone,
This is my first post here at Aeromir community forums. I am looking forward to learn from you and with you.
Great presentation by Wayne about options skew. From my limited experience with the subject and from a practical trading standpoint this is what I think:
This is my first post here at Aeromir community forums. I am looking forward to learn from you and with you.
Great presentation by Wayne about options skew. From my limited experience with the subject and from a practical trading standpoint this is what I think:
- We can't control options skew, but reasonable guess could be made how it's shape will change given certain market conditions.
- A skew curve could help to compare two different points in time and market conditions from a implied volatility perspective.
- Once in a trade, the answer to the question "why this or that happened" often could be found looking at the skew curve change.
Jim, good question about how much 1 IV point jump is worth. Your calculations can give some numbers but to get broader picture they need to be run on much bigger scale. I say that change in price highly depends on dte and on initial IV levels.
I know you have put together some tools to look at IV graphs and are able to to construct code to address your question in more details. I also have few pieces of code I use(ed) and plan to share some of them on one of 'IV meetings" - I'd appreciate input if you have time.
Arunas, welcome. Learning together is a goal I value most in trading communities.
Your points are valid but, imo, this is not enough, one can't stop there. All need to be approached in correct framework to be useful for a trader (I'm focused mainly in this approach - practical trading).
I know you have put together some tools to look at IV graphs and are able to to construct code to address your question in more details. I also have few pieces of code I use(ed) and plan to share some of them on one of 'IV meetings" - I'd appreciate input if you have time.
Arunas, welcome. Learning together is a goal I value most in trading communities.
Your points are valid but, imo, this is not enough, one can't stop there. All need to be approached in correct framework to be useful for a trader (I'm focused mainly in this approach - practical trading).
This thread has many different aspects, making it difficult for me to give each aspect appropriate thought/consideration.
My interest in this topic is mostly limited to how to improve my SPX short volatility trading.
Which aspect is believed to have greater impact on ones' trading profitability, if it were better understood?
1) concavity/convexity of skew (plot of IV per term)
2) slope of a section of the skew curve (say ATM to strike where delta =x or down by 1 expected move, ..)
Both the above should be taken with respect to impact on your proposed trade, and how it is expected to change during the trade.
I am not convinced there is any edge to be exploited here, but hope to be very wrong!
My interest in separating the topics is (a) the two are expected to be mostly independent, and (b) I prefer to focus on most productive area.
My interest in this topic is mostly limited to how to improve my SPX short volatility trading.
Which aspect is believed to have greater impact on ones' trading profitability, if it were better understood?
1) concavity/convexity of skew (plot of IV per term)
2) slope of a section of the skew curve (say ATM to strike where delta =x or down by 1 expected move, ..)
Both the above should be taken with respect to impact on your proposed trade, and how it is expected to change during the trade.
I am not convinced there is any edge to be exploited here, but hope to be very wrong!
My interest in separating the topics is (a) the two are expected to be mostly independent, and (b) I prefer to focus on most productive area.
marcas, is that a hint for me to do more work or are you volunteering?
dte will definitely have an impact. i used 37 dte over 3 iv levels. the iv levels have an
impact but on the spreads, less than i imagined. i'd be happy to look at some of your iv work.
Sure, I gladly do some joint project, but I prefer doing it in our Slack rather than here - it more convenient, imo. Naturally, results can be posted back here.
I'll be happy to share my approach to IV Graphs and to have some feedback. Since this IV subject popped out, I reopened some of my old projects and keep adding and removing stuff from it. Maybe other perspective will spark ideas we all can benefit from.
I'll be happy to share my approach to IV Graphs and to have some feedback. Since this IV subject popped out, I reopened some of my old projects and keep adding and removing stuff from it. Maybe other perspective will spark ideas we all can benefit from.
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.
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.