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One additional thought for Increasenow - if you don't want to spend the $500 for the SPAN program, perhaps you could get around it with a little extra effort. At every exchange there is someone whose job it is to set the risk parameters for SPAN (worst case scenario). If you can get hold...

Sorry, maybe I wasn't clear - the ES options ARE traded exclusively on the electronic. There is no such thing as an e-mini futures pit or options pit. I just meant to say that generally speaking - looking at all futures options contracts (crude, gold, soybeans, etc.) - there is still a very...

You're forgetting the most important element of the whole play Chirag - the relationship between the underlying and IV. This would work in the S&P options ONLY because every time the S&P goes up, IV goes down, and vice versa. So yes, if you found a contract with the opposite relationship...

The speed of moves up vs down is not what drives the skew. Look at natgas - down 40% in less than 2 months - and the otm calls STILL are at a premium to the otm puts. Or silver - down 36% in a month and again, the otm calls still are at a premium to the otm puts. You cannot understand the...

I don't think there's any easy way to do it except to buy the span program for some $500. Then every night you download the span file provided by the exchange and the program will use that to calculate your margin. It's not a simple calculation because it's based on risk - what will happen in...

I think you're thinking of the E-mini Richard - that is exclusively traded electronically, as are the E-mini futures. But overall, options on futures are actually an anachronism in that most of the volume in most contracts is still pit traded. In the crude options for example pit volume dwarfs...

The other side? You mean if you start out delta neutral and short gammas? I would just call that being short premium. In that case you'd want to lose the scalping bit, because negative gammas means every time the underlying moves your deltas move against you and you lose money. So every...

LOL - good summary!

Yes, I think the real and only way to understand the skew is to be in that market with a big position and experience for yourself what it feels like when the S&P jumps 50 points in a day vs what it feels like when the S&P drops 50 points in a day. Once you've had that visceral experience it...

That's an illusion caused by the fact that above a certain point (at every strike above a certain strike), each call is marked at the minimum price. That price is fictitious, because it can't be marked lower than the minimum price. But since the price is fictitious, the resulting IV is...

There's actually no "smile" of volatility in index options. Starting with the lowest strike, every higher strike trades at a progressively lower IV - all the way up to the highest strike. So the far OTM calls actually trade at a lower volatility than the ATM's. Instead of a smile, the "curve"...

Assume the futures are at 1200. Are you saying that the 1300 call volume might really be synthetic put buyers? I guess it's possible - I can't prove otherwise - but it just seems to defy common sense. Too tortured. You know the expression - "when you hear hoofbeats, think horses not...

One more risk sugar - your thetas on your long puts are greater than the thetas on your short calls, since you paid a higher IV for the puts than you got for the calls.

No no, gamma scalping is different. It's when you're long gammas and delta neutral - so every time the underlying moves the delta moves in your favor. Every time you even up your deltas, you're locking in a profit. I posted an article explaining gamma scalping about a month ago - did you...

Well the question is - do the leap IV's have a marked, significant inverse relationship to the price of the stock - as the VIX does to the S&P500? And taking into account the bid-ask spread - will you still be buying the puts and selling the calls at approximately the same IV? You need both of...

Actually, once you have this play set up (long the 1100 puts, short the 1300 calls, delta neutral against the futures), you can play it with futures alone. No need to touch the options position. That makes it really simple. Each time the futures go up, volatility goes down, and you will get...

The above scenario is not accurate. I'll try to find a moment over the weekend to work through a nuts-and-bolts example. In the meantime, assume that every time you buy or sell options, you offset your deltas with a trade in the underlying. This is a delta-neutral play.

Okay, but I want to emphasize that I'm not suggesting this play will work in 2008. The existence of the skew effectively eliminates it. I can show you how this play would work if all options traded at the same IV - how it worked in those golden days before the skew. If you understand how and...

Whoops, you're absolutely right. Thanks for pointing that out.

This is a misconception. Market makers don't come up with a mathematical theory or a distribution and then stubbornly stick to it, the market be damned. They just make markets based on the public buying and selling, which is what really creates the skew. Market makers are infinitely pliable...