Analysis based on IV Ratio (Volatility Skew)

Matt_ORATS said:
Hi Gowtham
ORATS has historical relationships for all US equity options back to 2007 along with many other metrics.
We forecast short-term (30 day) and long-term (2 year) slope, which is roughly what you are describing.
You can set up an analysis to predict the relationship yourself.
Here is a chart of the 30 day IV 25 delta / 75 delta (we have 5, 25, 50, 75 and 95 deltas available):
a32f1a560ea854964f5a54c2b77eab68.png


We describe this relationship as Slope and for ease of communication, turn it positive
d97882d668daf711aa4385406111883d.png

described here in the API docs: https://docs.orats.io/data-api-guide/core-research.html#implied-volatility-surface

Here's the Slope with the Slope Forecast and the ratio. When the ratio is high, we forecast slope to fall:
342138ba70b98958b54140bfe0bb92e2.png

Currently, the slope/forecast is near 1 meaning the slope is near our forecast.
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How do you choose 75 delta and 25 delta? I think you pick the nearest strike. I have had problems with this.
For example, sometimes the closest delta to 25d could be 24.5d for several days. Then it could become 25.5d. That fact that historically we had picked 24.5d and today we are picking 25.5d itself with skew the ratio. How do we handle this?
 
gowthamn said:
How do you choose 75 delta and 25 delta? I think you pick the nearest strike. I have had problems with this.
For example, sometimes the closest delta to 25d could be 24.5d for several days. Then it could become 25.5d. That fact that historically we had picked 24.5d and today we are picking 25.5d itself with skew the ratio. How do we handle this?
More...
Hi Gowthamn
We apply a smoothing system called the SMV for smoothed market values.

The first step in the SMV System is cleaning the quotes and applying good inputs to our modified binomial pricing engine. Using our dividend feed and option pricing methodologies, a residual yield is solved for based on the put-call parity formula. Applying the residual yield rate process helps with summarizing hard-to-borrow stocks or stocks with differing dividend assumptions. The effect is to line up the call and put implied volatilities.

Next, using the call and put mid-price IVs, a non-arbitrageable smooth curve is fit through the strike implied volatilities. This smoothing system produces a way to accurately reflect the implied volatilities at each delta bucket, here the 75 and 25 but we summarize every 5 deltas from 100 to 0 call delta.

Here's a blog on the subject: https://blog.orats.com/smoothing-options-implied-volatilities-using-orats-smv-system
 
Matt_ORATS said:
Hi Gowthamn
We apply a smoothing system called the SMV for smoothed market values.

The first step in the SMV System is cleaning the quotes and applying good inputs to our modified binomial pricing engine. Using our dividend feed and option pricing methodologies, a residual yield is solved for based on the put-call parity formula. Applying the residual yield rate process helps with summarizing hard-to-borrow stocks or stocks with differing dividend assumptions. The effect is to line up the call and put implied volatilities.

Next, using the call and put mid-price IVs, a non-arbitrageable smooth curve is fit through the strike implied volatilities. This smoothing system produces a way to accurately reflect the implied volatilities at each delta bucket, here the 75 and 25 but we summarize every 5 deltas from 100 to 0 call delta.

Here's a blog on the subject: https://blog.orats.com/smoothing-options-implied-volatilities-using-orats-smv-system
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This is nice. I always need 25 or 50 delta even if there is no leg exactly at 25/50 delta.

Today the 25 delta must the much more expensive than 50 delta in SPX than usual.
 
Below is our Chart in Wheel where you can see the 25 delta IV 30 day / 5 delta and to your point the 5 is more expensive than usual.
However, the 75/25 delta is still high as happens when vol falls.

4f737b07d364b19112b6434466e365ff.png
 
Matt_ORATS said:
Below is our Chart in Wheel where you can see the 25 delta IV 30 day / 5 delta and to your point the 5 is more expensive than usual.
However, the 75/25 delta is still high as happens when vol falls.

4f737b07d364b19112b6434466e365ff.png
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Thanks. Do you also have theoretical price for those deltas or just theoretical IVs?
 
gowthamn said:
This data too is available for all deltas at multiples of 5 irrespective of existing strikes?
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Gowthamn, yes.
This is in our Monies section of our API where you can see information by expiration.
Here's an example of SPX:
308cb98bf2a2c01cc742cba15c1bb44c.png

This shows the IVs by delta bucket 100 down to 0, the width of the bid ask in IV, the put-call slope and derivative (skewness & kurtosis). More explanations here: https://docs.orats.io/datav2-api-guide/definitions.html#monies-implied
 
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