IV skew

B

bookish

Anyone try using IV skew as an indicator for trading the underlying, instead of options? What results did you get? OR is this more like putting the horse in the cart and pulling it yourself?
 
Changes in Skew represent supply and demand in the option of that symbol or the market in general. You now have a choice. Do the same as what that change represents betting that that flow is smarter than the market or do you fad it and take the other side. As a market maker, I was forced to take the other side. I found that over time, that worked for me and when I was concerned that what I did was too risky, I adjusted my risk.

I just don't like betting that "hot money" is right, but others like the Najarian Brothers follow order flow and have done quite well.
 
Robert Morse said:
Changes in Skew represent supply and demand in the option of that symbol or the market in general. You now have a choice. Do the same as what that change represents betting that that flow is smarter than the market or do you fad it and take the other side. As a market maker, I was forced to take the other side. I found that over time, that worked for me and when I was concerned that what I did was too risky, I adjusted my risk.

I just don't like betting that "hot money" is right, but others like the Najarian Brothers follow order flow and have done quite well.
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May I ask how you adjusted your risks?

Thanks.
 
When I was a MM in the soft's pits, big orders would come in from the trade houses to buy hundreds of contracts at a strike and often times in order to participate, I had no choice but to eat contracts beyond my comfort zone which was about 50 contracts naked, 100 on spreads.. I had to put on big boy pants, layoff delta risk next pit on the futures, then flatten vega all day by leaning on the bids/offers on opposing contracts anywhere ! During the day, I had to dissect the positions in my head to figure out my "strong strikes" and "weak strikes" bec in the 90's we did not have the luxury of tablets or clerks giving the traders paper snapshots of their vulnerabilities (except for CRT and Timber Hill) . Here is a quick and dirty sample.
upload_2017-4-24_19-26-14.png


so we have a -5 future offset by the 5 lot reversal on the 7 strike / long the fly 25x / long 2 calendar on the 9 line... so in this case, do I need to buy 2 apr puts to cap my naked 2 on the 7 line and cover some of my naked 10 calls? maybe not ..coz my short fly makes $$ away from 8 either direction..BUT sugar is +Vomma on the upside unlike equities so...not that easy a decision.
 
EdgeQuest said:
When I was a MM in the soft's pits, big orders would come in from the trade houses to buy hundreds of contracts at a strike and often times in order to participate, I had no choice but to eat contracts beyond my comfort zone which was about 50 contracts naked, 100 on spreads.. I had to put on big boy pants, layoff delta risk next pit on the futures, then flatten vega all day by leaning on the bids/offers on opposing contracts anywhere ! During the day, I had to dissect the positions in my head to figure out my "strong strikes" and "weak strikes" bec in the 90's we did not have the luxury of tablets or clerks giving the traders paper snapshots of their vulnerabilities (except for CRT and Timber Hill) . Here is a quick and dirty sample.View attachment 173109

so we have a -5 future offset by the 5 lot reversal on the 7 strike / long the fly 25x / long 2 calendar on the 9 line... so in this case, do I need to buy 2 apr puts to cap my naked 2 on the 7 line and cover some of my naked 10 calls? maybe not ..coz my short fly makes $$ away from 8 either direction..BUT sugar is +Vomma on the upside unlike equities so...not that easy a decision.
More...
Thanks for your example. It gives me a sense of what a MM has to do to manage his/her positions, not an easy job.

Question: Didn't you have automatic software program to manage your trades?
 
ironchef.. all I had then on the floor was a bunch of sheets... printed with diff base vols in case market got crazy that day and the iv shifts... Every 1/2 hour, my clerk would refresh my positions on paper, and I had to dissect out the reversals, synthetics,etc.. The big guys timber hill,CRT had risk graphs every 1/2 hour or so...
 
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