Deviation from Historical Skew

[morganpbrown]

For the last 20 days I've computed (using sticky delta) a volatility surface -- IV(K-S,DTE) -- for SPY. (20 days is a pathetically small dataset, but I'm a cheap-ass, and haven't bought historical IV data.)

For each day's volatility surface, you can subtract the average IV to compute a "skew surface" (is this the correct terminology?). You can also average the skew surface over the 20 days to get a "historical skew surface". Finally, you can compute the deviation of today's skew surface from the historical skew surface.

There are some pictures below.

Would you expect the "skew surface" to be mean-reverting? If so, over what time period? Is there a trade buried somewhere in here, or is this yet another second-order effect that only the pros can exploit?

(If I'm interpreting this correctly, then it looks like you'd want to enter a calendar or diagonal where you sell short-dated calls and buy long-dated calls.)


Today's SPY volatility surface (calls):

Today's skew surface (volatility surface - average volatility):

Historical skew surface (average of volatility surface - average volatility for many days):

Today's skew surface - historical skew surface:

 

[mason macgregorson]

I find, trading robots, that the 5 days of the week are remarkably different so I do not aggregate data but separate by M - F. Might help you if all Mondays were analyzed, then Tuesdays, etc.

 

[morganpbrown]

I find, trading robots, that the 5 days of the week are remarkably different so I do not aggregate data but separate by M - F. Might help you if all Mondays were analyzed, then Tuesdays, etc.

Interesting.

Here's a plot of ATM IV, for 11, 50, and 100 DTE. You can see the slope of the ATM IV vs DTE increasing and decreasing. It looks like the variations are roughly weekly, but I can't say for sure. Maybe it is as simple as "the curve flattens every Friday" or something like that.

 

[Matt_ORATS]

Interesting.

Here's a plot of ATM IV, for 11, 50, and 100 DTE. You can see the slope of the ATM IV vs DTE increasing and decreasing. It looks like the variations are roughly weekly, but I can't say for sure. Maybe it is as simple as "the curve flattens every Friday" or something like that.

View attachment 270915

Here's a graph of the 10 day IV / 60 day IV, and the 60 day IV / 90 day IV.
Email me if you want to do a collaboration or something.

 

[morganpbrown]

Here's a graph of the 10 day IV / 60 day IV, and the 60 day IV / 90 day IV.
Email me if you want to do a collaboration or something.

View attachment 270938

Yup, that's the graph I was looking for! Thanks. There seems to be meaningful variation in the 10 day IV, within the 10-day life of the option. In my naivete, there sure seems to be a trade there. But I often have trouble unraveling the magnitude of the competing greeks. Sure, the IV on the 10 day call might move by 40%, but for instance, you still end up having to get the direction correct to make money.