I agree the 231 is very nice. In fact when you qoute some of the flies with flat skew, they are usually 100% more than market(longer dated flys 60 - 100 Dte). I have noticed you trade very slightly OTM 231 P flys short dated. Why not go a bit further OTM and get more skew? You trade the 2 week Dte, 95%/97.5%/102.5% 231 P Fly. Correct me if I am wrong.
Local vol and skew
- Thread starter TheBigShort
- Start date
I trade many of those to LTD/expiration so I am targeting a price. I put a portion of all gains into a series of OTM 231P flies.
When you are deciding if the skew is fair, are you looking at local vol? I am finding it challenging using BSM to decide if skew is fair. Ie. SPX 90% 3 month skew is 16% but if spot actually trades to 90% moneyness, then spot will most likely be around IV of 30%. Local vol is telling me 47% for an instantaneous move, which makes more sense.
LOL cmon Des! Whats the price tag
You can price the fly at the outside wing using local vol. That should be a column on any r/t sheet.
Maybe my question should be, why would I decide to use a local vol or Stochastic vol model for determining fair skew rather than the BSM.
Because the only time that BSM will represent IRL results is when strips are at 30 due to price shocks & zero curvature.
I price all legs at ATM vol as well for modeling edge.
Sorry Des, having trouble with your code here. IRL?
Do you not agree with the market that downside vol should be elevated?