Options Education - Got a Website / Book / PDF You Like? Post It Up

Skew in options - Search
https://duckduckgo.com/?q=Skew+in+options

Implied volatility surface parameters in options - Search
https://duckduckgo.com/?q=implied+volatility+surface+parameters+in+options

"In options trading, to find an edge, it is useful to
compare implied volatility surface parameters and market values
to forecasted parameters and to theoretical values computed using these parameters."

https://www.elitetrader.com/et/threads/is-skew-cheap-or-expensive.360036/
https://www.orats.com/
delete orat.jpg



Matt_ORATS said:
Skew in options is the slope of the implied volatility of the strikes in an expiration month. Skew is constantly changing and can affect the value of options and spreads. Risk reversals and wide vertical spreads are among the most affected by changes in skew.

So, how do you know if skew is cheap or expensive?

The first step is to calculate a slope of implied volatility. If you solve for a residual rate that lines up the call and put IVs, calculate good deltas based on a smoothed skew, and plot IV against delta, you will be at a good starting point. Some use other measures than delta that turn out not to be as good at normalizing the skew needed to compare the current skew to related calculations.

Next, calculate a constant maturity slope, like 30 days slope, by weighting the expiration slopes around 30 days.

Next, make comparison calculations for the 30 day slope:
More...
Matt_ORATS said:


    • Create a forecast of slope using historical data and linear regressions.
    • Take the slope percentile for a year.
    • Obtain the slope from the best related ETF and observe the historical ratio of the slopes.
    • Calculate the average slope over the past month and year.
    • Average the components slope of the best ETF.
How does the Slope look now for SPY?

Currently, the Slope of the SPY is 9.1 (see 'the smile' below for an explanation). That's the 87th percentile for the year and 8.4% above the forecasted slope of 8.4. The slope divided by the best ETF, in this case IWM, is 1.7 that is near the top of that range. Considering these factors, we can say that the SPY slope appears overvalued. Here’s a graph of these factors.

0853e9f2faa10edf7c8ab1504735040b.png



The Chart tab in the Wheel presents these data points historically back to 2007. The documentation and other blogs (search 'slope') explain the various measurements. The data API can be used to get these data too.

Slopes can be observed in each expiration by using the Monies endpoint of the API. Below is typical: The slope is lower for the near months and greater for the other months. The very far months fall in between.

d8797e77cdff960359833a4e4d4111eb.png

Slope construction

ORATS describes the implied volatility surface as a 3-dimensional surface where the independent variables are time to expiration, and option delta and the dependent variable is implied volatility. To illustrate an implied volatility surface, we have developed a 2-dimensional graph that displays all three axes in the figure below. Summary information about this surface gives the trader a macro view of the implied volatilities for each option chain. ORATS takes a snapshot of all options on all symbols approximately 14 minutes before the close of trading. Options markets from this time are often of higher quality than at the close.

ORATS measures the surface using the following summary characteristics: at-the-money volatility, strike slope, and derivative (curvature).

8f46c9dd8f01e5eca814bde59499c418.png

The "Smile"

At-the-money volatility is the implied volatility at the 50 delta call and put. Strike Slope is a measure of the amount that implied volatility changes for every increase of 10 call delta points within the intra-month skew. It measures how lopsided the 'smile' or 'smirk' is. The derivative is a measure of the rate at which the strike slope changes for every increase of 10 call delta points within the intra-month skew. It measures the curvature of the intra-month skew or 'smile.' We chose just two parameters to describe the skew to get a reasonable fit for the fewest assumptions.

Using this method of describing the skew has the additional benefit of producing accurate at-the-money volatility readings important for summarizing the term structure.

#Forecasting the Implied Volatility Surface

These sophisticated methods of summarizing and manipulating the implied volatility surface allow us to compare summary characteristics across related equities and over time. These observations are then used in volatility forecasting models. In options trading, to find an edge, it is useful to compare implied volatility surface parameters and market values to forecasted parameters and to theoretical values computed using these parameters.

More reading...
More...

 
Last edited:
What's the latest options "bible" now with coverage on weeklies, especially on the write side? McMillan's Options as Strategic Investment latest edition was written in 2012 before weeklies.
 
turkeyneck said:
What's the latest options "bible" now with coverage on weeklies, especially on the write side? McMillan's Options as Strategic Investment latest edition was written in 2012 before weeklies.
More...
That's worth starting a thread about. Go for it man.
 
Options Open Interest and Volume
https://tackletrading.com/options-101-bidask-open-interest-and-volume/

"Options contracts are derivative products where their value is dependent on factors driven by the stock price, time til expiration, implied volatility and characteristics that are driven by the strike price you trade. In this week’s article, we will look at the Bid/Ask spread, open interest, volume, and how these characteristics affect a trader’s decision-making."

Using Open Interest to Find Bull/Bear Signals
https://www.investopedia.com/articles/technical/02/112002.asp

"Traders often use open interest is an indicator to confirm trends and trend reversals for both the futures and options markets. Open interest represents the total number of open contracts on a security. Here, we'll take a look at the importance of the relationship between volume and open interest in confirming trends and their impending changes."

trading options Volume and Open Interest.jpg
 
"The short strangle option strategy is a limited profit, unlimited risk options trading strategy
that is taken when the options trader thinks that the underlying stock will experience little volatility in the near term.
Short strangles are credit spreads as a net credit is taken to enter the trade."

Short Strangle options strategy - Search
https://duckduckgo.com/?q=short+strangle+options+strategy&t=h_&ia=web

10-Delta Short strangles - Search
https://duckduckgo.com/?q=10-Delta+Short+strangles&t=h_&ia=web

10-Delta Short Strangles
https://www.elitetrader.com/et/threads/10-delta-short-strangles.360262/

delete Short Strangle Payoff Diagram.jpg

Theinkdon said:
Hi all, I think is my first-ever post on ET, but I've been reading for a year or so.

TLDR: High IVR stocks with at least 2M volume and weekly options, short strangles with legs at 10∆, 5-10DTE, take profit at 50%, roll untested legs up/down as the other side is challenged, to a straddle if necessary but not inverted. Roll out a week if it can't be saved otherwise.

If you want to skip all the backstory that's coming up, and how I got to the point of wanting to start this journal, then skip to the next post called "RESULTS".

About me: 57m, trading stocks, mutual funds, and ETFs since about 1993 with mixed (mostly positive) results, but very interested and active in the market (401(k)s, Roths, TSP, etc). Messed with options a few times not knowing what I was doing, lost money, stopped doing that.

January 2021 I decided to teach myself options. When I decide to do something I tend to go overboard (ask my wife). Bought and read books by Hull, McMillan, Cohen, Wolfinger, and probably some others. Watched a lot of TastyTrade stuff, read a bunch of forums, watched a lot of Youtube videos, training courses through CBOE, Fidelity, And TD Ameritrade (TDA), etc.

Opened 2 TDA paper-money accounts under one of our real Roth accounts, and practiced lots of strategies in those: long calls, covered calls, cash secured puts, naked puts, put credit spreads, call credit spreads, and iron condors. I think those are all the strategies I tried in earnest.

I first got excited about ICs but abandoned those because they weren't growing fast enough for me. Then I thought that PCSs were the sauce, but then suffered a 28% drawdown that was disturbing; but in a couple weeks I was back even, however after another couple of weeks I had another similar-size drawdown. So I gave up on that.

Next I started selling naked puts, and that was doing pretty well. And then one day I read where someone said, "the broker's already holding the buying power (collateral) for the Put, so you might as well sell a Call also and make it a Short Strangle (SS)." Sounded interesting, so I started trying those, probably at around 20-30∆ like TT recommends.

Then someone on Reddit/options obliquely mentioned that he does SS's at 10∆, which seemed crazy that you could go way out there in strikes and still get decent premiums. But I tried it and it seemed to work. One week led to 2 weeks led to 1 month where it just kept working with no drawdowns over 5%. So I kept going.

Results in the next post. Thanks and congratulations if you read this far!
More...
 
You must log in or register to reply here.
Back
Top