Implied Volatility vs. Real Volatility

Quote from newwurldmn:

You can be long skew and short local gamma.
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can you give me an example strategy..of what you were referring to.. i'm just curious..

ratios to me are a way to play skew.. if your selling a near the money put and your buying more otm puts.. or if your buying near the money and selling otm in ratio.. a buy overwrite..
i know a risk reversal is another way to play skew.. but from what i understand all of them are rather hard to manage..
 
Quote from cdcaveman:

He is asking for a specific example... I think.... like what your talking about would be short near the money and more contracts long out of the Money.... your short gamma local long skew... am I right... ratio back spread -1/+2 and ratio writes +1/-2. Doesn't have to be this exact ratio..

Or like being short a straddle/fly against deeper otm back spreads or puts

Long net premium I though referred to long contracts to short contracts. Not dollar amounts long against dollar amounts short... correct me now :)
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Yes I was hoping for a specific example for what Sle was referring to. My interpretation of what long skew and short gamma could be tallies with yours, ie ratio back spread with the long contracts far enough away to leave you nett short gamma.

Really appreciate the help guys, but you need to close your eyes, take a few deep breaths, then take yourself back to when you were new to options. You knew a little bit about everything, but not a heck of a lot about anything, and a lot of stuff you really needed to know you did not even know existed.

At this stage of the journey, specific examples are like gold nuggets.
 
Quote from justrading:

Yes I was hoping for a specific example for what Sle was referring to. My interpretation of what long skew and short gamma could be tallies with yours, ie ratio back spread with the long contracts far enough away to leave you nett short gamma.

Really appreciate the help guys, but you need to close your eyes, take a few deep breaths, then take yourself back to when you were new to options. You knew a little bit about everything, but not a heck of a lot about anything, and a lot of stuff you really needed to know you did not even know existed.

At this stage of the journey, specific examples are like gold nuggets.
More...

well... i'm new to options.. new to trading... and alot of times i think i have my head wrapped around an idea.. then i find so many slight nuances that make a world of difference...

ratio backspreads i have never made any money on.. that being said.. when i first learned about them .. all i could think is all i had to do was put backspreads in single names that i thought were going to go bust and my main risk carrying the margin... AS putting on Ratio backspreads generally goes on as a slight debit. and if you want a credit you typically have to spread wider across the strike space.. that being said in 2+ month options volatility is more of a factor then front months... i personally came to the conclusion that if i was buying default risk/ tail event risk in single names i should just outright buy deeper otm puts.. which i never ended up doing..

theoretically all SLE is conveying is that because the skew in the index is higher then in the constitutions .. all you would do is swap risk.. I'm not sure how to go about selecting which members.. but thats the art of it... the simplest strategy is just selling puts in the index and buying puts in single names.. you could of course express your short and long skew play in any number of ways.. delta hedging a risk reversal... etc..
i'm not sure how you don't end up becoming a stock vol picker.. how do you know which vol to buy... obviously your selling index skew.. how does one profile single names to buy skew in.. you have strike risk to deal with...correlation risk to deal with..

If your not rolling risk reversals on the regular as the underlying moves and or making adjustments to your skew trades generally.. your actually trading alot of other risks not just skew..

so the question is.. how does one isolate skew in options trades ..
 
Quote from justrading:

Yes I was hoping for a specific example for what Sle was referring to. My interpretation of what long skew and short gamma could be tallies with yours, ie ratio back spread with the long contracts far enough away to leave you nett short gamma.

Really appreciate the help guys, but you need to close your eyes, take a few deep breaths, then take yourself back to when you were new to options. You knew a little bit about everything, but not a heck of a lot about anything, and a lot of stuff you really needed to know you did not even know existed.

At this stage of the journey, specific examples are like gold nuggets.
More...

hey bro..
read this for starters ..

http://www.ise.com/assets/files/FX ...y_-_Trading_With_or_Against_the_Skew_0410.pdf
 
Quote from cdcaveman:

well... i'm new to options.. new to trading... and alot of times i think i have my head wrapped around an idea.. then i find so many slight nuances that make a world of difference...

ratio backspreads i have never made any money on.. that being said.. when i first learned about them .. all i could think is all i had to do was put backspreads in single names that i thought were going to go bust and my main risk carrying the margin... AS putting on Ratio backspreads generally goes on as a slight debit. and if you want a credit you typically have to spread wider across the strike space.. that being said in 2+ month options volatility is more of a factor then front months... i personally came to the conclusion that if i was buying default risk/ tail event risk in single names i should just outright buy deeper otm puts.. which i never ended up doing..

theoretically all SLE is conveying is that because the skew in the index is higher then in the constitutions .. all you would do is swap risk.. I'm not sure how to go about selecting which members.. but thats the art of it... the simplest strategy is just selling puts in the index and buying puts in single names.. you could of course express your short and long skew play in any number of ways.. delta hedging a risk reversal... etc..
i'm not sure how you don't end up becoming a stock vol picker.. how do you know which vol to buy... obviously your selling index skew.. how does one profile single names to buy skew in.. you have strike risk to deal with...correlation risk to deal with..

If your not rolling risk reversals on the regular as the underlying moves and or making adjustments to your skew trades generally.. your actually trading alot of other risks not just skew..

so the question is.. how does one isolate skew in options trades ..
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I know you are new too buddy, the point was directed at the folks who are so far down the options road they probably could not see us if they turned around and looked really hard. :)

Deep OTM calls and puts a few months out are what I think of as macro plays, eg I expect the debt ceiling issue to be settled in some way or another and for the markets to take off, so I look for say April or May deep OTM calls. Haven't done that either but it's the sort of punt I have at the back of my mind.

As for selling index puts and buying puts for individual names, wouldn't the index puts be margined as naked?
 
Quote from justrading:

I know you are new too buddy, the point was directed at the folks who are so far down the options road they probably could not see us if they turned around and looked really hard. :)

Deep OTM calls and puts a few months out are what I think of as macro plays, eg I expect the debt ceiling issue to be settled in some way or another and for the markets to take off, so I look for say April or May deep OTM calls. Haven't done that either but it's the sort of punt I have at the back of my mind.

As for selling index puts and buying puts for individual names, wouldn't the index puts be margined as naked?
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index here could be puts on the SPY... yes they could be naked.. which is no different then being long the index as far as risk is concerned.. you can spread to as well to deal with the margin requirements.. IE credit spreads.. some of the most confusing things for me were the new vocab for sure.. well buying calls believe it or not is taking a view on vol, skew, implieds etc.. your basically saying.. not only is the market going up.. its going up faster then the options have priced in.. as you go out into the term structure.. meaning from the front month options out into the back month options.. the risks change quite a bit... its hard to play in the options game and get really good edge without really getting the advantages of understanding term structure and skew.. the expression "you can be right and still lose " comes from moves already being priced in..
determining which side of the distribution is rich or cheap is speculation.. the calls could look cheap relative to the puts.. the market could be trending up, and you can still lose money...
i got this book just now .. i'm reading it..
Inside Volatility Arbitrage : The Secrets of Skewness
 
Quote from cdcaveman:

hey bro..
read this for starters ..

http://www.ise.com/assets/files/FX ...y_-_Trading_With_or_Against_the_Skew_0410.pdf
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Thanks. I understand why there is skew, but it's nice to see graphical depictions of different skews on the same page. This is the same as Hoadley's 3D volatility surface, but I think easier to see variances across many expiries, at least for me.

I'm not some market wizard, so for me to say any IV is too high or low, I would have to compare to historical IV, which brings us back to my original question way back about using historical IV and data services for this.

Livevol looks nice, probably not as clunky as Hoadley.
 
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