I'm trying to understand how to quantify skew delta, I understand that its the shadow delta from dvol/dspot, but is there a mathematical value for it. (not sure if something like vanna*(local vol diff) would work), Also what does running a "full skew delta" mean?
How to quantify skew delta
- Thread starter Marizcharles
- Start date
Robert Morse
Sponsor
Marizcharles-Your question might be above my brain power, and this might not answer your question or be too simple of an answer. When I was an Option MM, I monitored the value of the 25 Delta put - the 25 Delta call. When there a material change, it was typically from larger orders in that stock symbol. I never traded broad based indexes, but I think the change in that value is important.
Matt_ORATS
Sponsor
We call our measurement "slope". We calculate deltas based on a smoothed IV curve.
Here's how we approach it:
1. Definition: We define skew as the difference in implied volatility (IV) between out-of-the-money (OTM) and at-the-money (ATM) options. A positive skew means OTM puts have higher IVs than ATM options.
2. Slope Calculation: We calculate the slope as the best-fit regression line through the strike volatilities, adjusted to the tangent slope at the 50 delta. This gives us a measure of how steeply the IVs are changing across different strike prices.
3. Delta-Based Measurement: We express the slope as the change in implied volatility for every 10 delta increase in the call delta. This allows us to compare skew across different underlying prices and volatility levels.
4. Standardization: We typically look at the 30-day interpolated slope to standardize across different expiration dates.
5. Relative Measures: We often compare the current slope to historical averages or to similar stocks/ETFs to get a sense of whether the current skew is high or low.
6. Time Series: We track the slope over time, allowing us to see how it changes in response to market conditions or upcoming events.
7. Forecasting: We even create forecasts of future slope based on historical patterns and current market conditions.
In addition to slope, we also look at other aspects of skew: - Deriv (or curvature): This measures how the slope itself changes across different deltas. - Contango: This compares short-term and long-term implied volatilities to capture term structure effects. We also provide percentile rankings of the current slope compared to its 1-month and 1-year history, and ratios of the slope to relevant ETFs or indexes. All of these measures help traders understand the current state of the volatility surface and how it compares to historical norms or similar securities.
Here's how we approach it:
1. Definition: We define skew as the difference in implied volatility (IV) between out-of-the-money (OTM) and at-the-money (ATM) options. A positive skew means OTM puts have higher IVs than ATM options.
2. Slope Calculation: We calculate the slope as the best-fit regression line through the strike volatilities, adjusted to the tangent slope at the 50 delta. This gives us a measure of how steeply the IVs are changing across different strike prices.
3. Delta-Based Measurement: We express the slope as the change in implied volatility for every 10 delta increase in the call delta. This allows us to compare skew across different underlying prices and volatility levels.
4. Standardization: We typically look at the 30-day interpolated slope to standardize across different expiration dates.
5. Relative Measures: We often compare the current slope to historical averages or to similar stocks/ETFs to get a sense of whether the current skew is high or low.
6. Time Series: We track the slope over time, allowing us to see how it changes in response to market conditions or upcoming events.
7. Forecasting: We even create forecasts of future slope based on historical patterns and current market conditions.
In addition to slope, we also look at other aspects of skew: - Deriv (or curvature): This measures how the slope itself changes across different deltas. - Contango: This compares short-term and long-term implied volatilities to capture term structure effects. We also provide percentile rankings of the current slope compared to its 1-month and 1-year history, and ratios of the slope to relevant ETFs or indexes. All of these measures help traders understand the current state of the volatility surface and how it compares to historical norms or similar securities.
Thank You for laying this out in sequential and clear logic...
I could be in error but I thought when I read your home website explanation, about this subject a few months back, there was a mention of the importance of Calendar Arbitrage ?
For an increase in IV SKEW slope accuracy ?
Do I have that wrong or... ? Can you advise ?
TYou...
It literally is the vega times the expected change of fixed stirke IV per percent move in underlying. That makes it model dependent (obviously) and there are a bunch of different models, some explicitly describing spot-vol correlation like SABR. This said, there are kinda 3 key "modes" - sticky strike (strike vol stays the same), sticky delta (same delta vol stays the same) and sticky local vol (strike vol goes up at the same rate as the slope of the skew).
The meaning of it really gonna depend on the asset class. In equities that usually means sticky local vol, in rates usually means running your vol at full normal.
Questions for you sir:
1. You said in equities that usually means sticky local vol, does it apply to all expiries?
2. Any theoretical reasons why it happens as such?
Thank you.
Hi Matt
Can you create indicators and chart them in ORATS? I'm wanting a 25 delta normalized risk reversal (skew), and to chart normalized risk reversal vs time.
Can you also create such indicators, and scan for certain conditions across all the indexes and etfs?
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TLDR: pg 16 of the attached pdf.
Under stoch vol modeling, you call delta adjusted for skew (volcorr) "Minimum Variance Delta (Delta_MV)." You can think of pure* skew delta as Delta_MV minus Black-Scholes Delta (Delta_BS). Hull and White find that a quadradic fit in Delta_BS / (sqrt(T) * S) provides a good approximation (see pg 16). This fit moves slowly during the day and is close to locally linear. So fit it once or twice a day and from there back of the envelope (or in your head) calcs should suffice.
*actual hedge ratios should also account for expected re-hedge frequency and may differ significantly from pure deltas.
Matt_ORATS
Sponsor
ORATS can chart various skew indicators and ratios of those indicators. These can also be used in a scanner to identify those stocks, ETFs or indexes that match the criteria. For example, the bottom chart is the 25 delta ATM 20 days to expiration over the 75 delta. There are thousands of possible ratios you can chart:
https://gyazo.com/ce751f2f25a1080fdbf1c6e3af200eca
Here is the Stock Scanner sorting on that 25/75 delta ratio ascending.
https://gyazo.com/49b5a3e3f15cad43f4cbf22ec159282d
You can also tie the stock scanner into the options scanner to find the best options trades for these symbols.
https://gyazo.com/ed01f50b80edbce3d031410c21d19092
https://gyazo.com/ce751f2f25a1080fdbf1c6e3af200eca
Here is the Stock Scanner sorting on that 25/75 delta ratio ascending.
https://gyazo.com/49b5a3e3f15cad43f4cbf22ec159282d
You can also tie the stock scanner into the options scanner to find the best options trades for these symbols.
https://gyazo.com/ed01f50b80edbce3d031410c21d19092
Matt_ORATS
Sponsor
We have a Confidence indicator that ranges from 0 to 1 for the amount and width of options in a particular month and an average for each symbol.
We have Contango to measure the calendar skew.