One thing I don’t understand about skew:

[Wheezooo]

It is why with option trading, or any trading for that matter, success can not be guaranteed from reading a book. If I could mind meld all knowledge I have of trading to someone else, I would still bet against them. Very few people have the constitution to handle the downs.

 

[Sig]

I have to laugh because I have those same awful memories...hardly remember my really good trades, only the really bad ones. And I couldn't stand the other traders who would insist on trying to sell you more where you just bought them. But looking back I should have doing the same thing as them.

"Options may be about math, but there is a reason quants make sucky traders."

I trained under a guy who was a physics/econ double major from U. of Chicago. He was also a member of the Mensa club. He used to wear his Mensa club tie on the floor everyday. Bragged about how much smarter he was than everyone, condescending as all hell. Really knew his options theory, and he could recite the Black-Scholes equation at the top of his head. And guess what? He was the worst trader I've ever seen. He over-analyzed every little trade he did to death, suffered from chronic analysis paralysis. After every trade he would step outside the pit, his hands shaking and his brow dripping with sweat, and try and come up with every possible scenario how he might lose money. Then he would run back in the pit and immediately try to get out of it. It was both comical and sad to watch. He didn't last 6 months in the business.

Anyone who wears a Mensa tie around has got some issues. Making a broad based conclusion based on your experience with the dude, also probably indicative of something. There are some "gut feel" guys trading their own money, probability says at least a few will be successful. A couple made it to hedge fund level, most have subsequently blown up. And the vast majority of money is traded by professionals, the kind who yes, can quote BS off the top of their head because it's a very basic and very fundamental concept of their profession and they're professionals.

 

[Wheezooo]

You don't get invited to a lot of parties, do you Sig?

 

[VolSkewTrader]

Anyone who wears a Mensa tie around has got some issues. Making a broad based conclusion based on your experience with the dude, also probably indicative of something. There are some "gut feel" guys trading their own money, probability says at least a few will be successful. A couple made it to hedge fund level, most have subsequently blown up. And the vast majority of money is traded by professionals, the kind who yes, can quote BS off the top of their head because it's a very basic and very fundamental concept of their profession and they're professionals.

Interesting generalization you have concluded about who makes it and who doesn't in this business. You wouldn't happen to have any quantitative support of this notion? If so would love to read up on it.

 

[Sig]

Interesting generalization you have concluded about who makes it and who doesn't in this business. You wouldn't happen to have any quantitative support of this notion? If so would love to read up on it.

Sure, try https://papers.ssrn.com/sol3/Delivery.cfm/SSRN_ID1573111_code863755.pdf?abstractid=1013421&mirid=1 and a little more orthogonal but a seminal study none the less
https://www.emeraldinsight.com/doi/full/10.1108/15265940710750495 for starters. You can also try looking at the employment reports for Harvard, Stanford, Wharton, Booth b-schools vs a random selection of business schools by industry on graduation and x years out by industry, they all publish them on their web sites. And if you're a fan of anecdotal evidence, why don't you put in an application to GS and a couple of hedge funds and let us know how it goes?

 

[Sig]

You don't get invited to a lot of parties, do you Sig?

Interesting metric of success. You concern is touching, but no need to worry. I enjoy get togethers with my friends and neighbors and only go to parties if putting on a tux is absolutely necessary. Besides weddings which I generally enjoy, I've managed to avoid that nonsense for nearly a decade now thank goodness.

 

[Wheezooo]

"You(sic) concern is touching, but no need to worry."

I showed no such thing.

 

[ironchef]

As for flat earth. Ever been to Kansas? End of argument!

Even in Kansas, if you look at the horizon, it is still slightly curved, not a straight line.

 

[ducatista]

Need to point out something important to you. When you look at the IV skew of the strikes, the shortest months almost always look steeper and more negatively skewed, which often times is the case. But when you compare the IVs of the deltas or standard deviation points across all months on the term structure, often times they are the same or even steeper in the further out maturities. Here are some examples:

View attachment 206338

View attachment 206339

These were taken live from a product I trade. Notice how the 1st month (purple line) IV puts skew based on delta are relatively the same as the other months. If this was an IV vs strike graph the 1st month skew would be much more pronounced. I don't ever graph or look at the skew based on strike or simple moneyness which most beginners do. It's like comparing apples to oranges. You need to adjust for the time factor between the different maturities. Comparing IVs of the same deltas or sigma points is much more relevant and what most sophisticated option trading desks do. So there you go.

If I may revive an old thread (as I start to better understand what was communicated within it ha):

McMillan in his books mentions that IV for a LEAPs generally trades in a tighter range compared to near term maturities. I understand his remark when curves are compared across strike... the LEAPs are flatter, the near terms are steeply skewed and relatively more sensitive, etc.

But what if we standardize the curves as you did above? Let's say according to their Delta. The curves are much more commensurate in shape.

My question: does his contention that IV trades in a much tighter range still hold up when we compare across Delta? I don't think it would, right?

To be clear, he was addressing traders against using LEAPS in a short calendar (long front month, short LEAPs) due to - Im assuming - time Vega risk. I'm guessing he was moreso addressing the point that the LEAPs leg may be more unresponsive than the near month leg to changes in volatility measured across strike. But as an absolute generality made when comparing two curves across Deltas, his comment about the IV range being tighter would not hold water, correct?

 

[TommyR]

my suspicion on skew is that it may be to do with the gamma process part of the levy kinchtine exponential, intesnsity versus size of the up moves and down moves . probably the odd terms in the characteristic function. if one was to sell in an escalating fashion and then buy it all back this would not be skew because the time between the selling is not exponentially distributed.