No market panic in the Skew

[xandman]

Is it any wonder why the current repricing is only occurring at the ATM vols?

http://www.barchart.com/chart.php?sym=$SKEW&t=LINE&size=M&v=0&g=1&p=D&d=X&qb=1&style=technical

Additionally, how would Iron Condor Sellers feel about selling into this spike?

 

[stepandfetchit]

xandman :
Your first statement may be beyond my pay-grade! <-- . (Thnx: I see a CBOE White paper https://www.cboe.com/micro/skew/documents/SKEWwhitepaperjan2011.pdf that may reduce my ignorance a bit)

Regarding an IC entry... I, would not; since an is IC typically placed on channeling pricing, and we just had an abnormal move. So, unless one has conviction that the bottom has been reached (and you desire to leg into the PUT side only at this point, or just the PUT credit spread), this seems to be a high risk entry for me.

 

[xandman]

xandman :
Your first statement may be beyond my pay-grade! <-- . (Thnx: I see a CBOE White paper https://www.cboe.com/micro/skew/documents/SKEWwhitepaperjan2011.pdf that may reduce my ignorance a bit)

Regarding an IC entry... I, would not; since an is IC typically placed on channeling pricing, and we just had an abnormal move. So, unless one has conviction that the bottom has been reached (and you desire to leg into the PUT side only at this point, or just the PUT credit spread), this seems to be a high risk entry for me.

You don't have to go that far. Here is the cliff notes:

A level of 140 means wings are pricier. A level of 120 means wings are cheap. So, even with the spike in IV, IC sellers may not be getting compensated enough for the risk.

At this point, anyone who wants to short vol might want to switch strategies that short the ATM vol. ie buy writes, calendars with appropriate hedges/exposure to delta effects, obviously.

If I legged into a ATM put spread right now, I probably would not bother capping it with an upper wing to make a condor when the market recovers. Thus, I would also size more conservatively.

 

[cdcaveman]

Skew would be before the move
... No????

 

[der_kommissar]

Man this "Fed put" is going to be very expensive.

 

[xandman]

Skew would be before the move
... No????

It was elevated in the (some of the)last major move. But going back through the history of major moves, I see no predictive capabilities. That's actually something I want to research formally. Admittedly, finding a filter to make it a timing tool sounds too holy grail-ish.

 

[cdcaveman]

How would you measure skew just curious ... Maybe like a certain width put spread to a degree of moneyness...

 

[xandman]

The implementation and maths are beyond me, right now. I have no research experience beyond dissecting a frog.

However, one could go with the CBOE calc if it's not proprietary. Back date their calculation method to a much longer historical period. Do a time series analysis on that series against the market for starters.

But much more thorough would require calculus. Perhaps, the using the slope of a tangent line since the skew is basically a polynomial equation. That would probably require academic guidance on using the right maths.

 

[xandman]

How would you measure skew just curious ... Maybe like a certain width put spread to a degree of moneyness...

Oops. Sorry. Was rambling thinking my thoughts were interesting.....

20 delta put and calls in a Risk Reversal. Visualization is thru a cute thumbnail graph in excel. Sometimes. I change the deltas. A simple RTD link on my spreadsheet. I actually don't think about it much anymore since the CBOE Skew is so convenient.

An early attempt to make something usable:

 

[longthewings]

You don't have to go that far. Here is the cliff notes:

A level of 140 means wings are pricier. A level of 120 means wings are cheap. So, even with the spike in IV, IC sellers may not be getting compensated enough for the risk.

At this point, anyone who wants to short vol might want to switch strategies that short the ATM vol. ie buy writes, calendars with appropriate hedges/exposure to delta effects, obviously.

If I legged into a ATM put spread right now, I probably would not bother capping it with an upper wing to make a condor when the market recovers. Thus, I would also size more conservatively.

If I'm not mistaken, index skew should be expected to flatten during severe declines/market panic. It's the convexity effect. The overall vol level is repriced dramatically higher. Think how the distribution of gamma changes with vol. Low vol = thin high peak near the money dropping off quickly into the tails/wings. High vol = Lower peak, carrying further into the wings and declining at a slower rate -- ie. a flattening.