Mixing RV with relating IV and SKEW is like pissing in the stew!
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Question about (Strike Price) Implied Volatility Skew
- Thread starter TradingDemystified
- Start date
I think with enough sophistication, tracking the skew curve over time and assigning values at different points in the skew that indicate it's level of acceleration (or deceleration) from the atm IV, along with how many days until expiration (because skew will change as it gets closer to xdate), it could be done pretty successfully? I'm sure otm puts must sharpen in down moves and vice verse, and those swings, especially sharp swings in the entire skew, must have profit opportunities...but yeah, that's not me lol.
the issue with skew is that at the end of the day you are trading fixed strike vol (unless you are trading variance). So the 90-110 today becomes the 100-120 and with that your Vega and gamma profile changes. So you have to make spot vol correlation bets that are tricky. Sometimes the vol resets up. Sometimes it resets down.
In the 5percent rally, vol fixed strike vol (at least front month) didn’t come in that much. But it easily could have.
Yes, so fixed moneyness not fixed strike. Is that incorrect?so as the spot is moving around you are calculating sk10 using the current 90-110?
Yes, so fixed moneyness not fixed strike. Is that incorrect?
there’s no incorrect or correct way to measure it.
It’s only tradeable as fixed strike.
Of course. But nonetheless I'm still having issues calculating a relationship that should exist.there’s no incorrect or correct way to measure it.
It’s only tradeable as fixed strike.
https://www.elitetrader.com/et/thre...e-volatility-plays.301129/page-2#post-4303755
Is this relationship consistent with what you have observed as well?
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Of course. But nonetheless I'm still having issues calculating a relationship that should exist.
https://www.elitetrader.com/et/thre...e-volatility-plays.301129/page-2#post-4303755
Is this relationship consistent with what you have observed as well?
my experience has been that if you are short skew you tend to lose ALOT of money when vol goes up. I don’t know how much is from skew steepening vs being short Dgamma/dvega as the whole curve goes up or getting shorter gamma because you’ve moved into your short strike. Or because you are short vol of vol and that goes up.
I don’t think skew should necessarily steepen if vol goes up but common sense would say that the putside should get bid, but my experience is that the call side also gets bid.
My definition of realized skew is different from sle’s.
I would call realized skew as Vega pnl of your two strikes + gamma pnl related to the marking of those strikes.
I don’t know what he’s defining there.
I would call realized skew as Vega pnl of your two strikes + gamma pnl related to the marking of those strikes.
I don’t know what he’s defining there.
All of these complexities and position management issues are why I don't trade options anymore. Once I started trading stocks, never looked back.the issue with skew is that at the end of the day you are trading fixed strike vol (unless you are trading variance). So the 90-110 today becomes the 100-120 and with that your Vega and gamma profile changes. So you have to make spot vol correlation bets that are tricky. Sometimes the vol resets up. Sometimes it resets down.
In the 5percent rally, vol fixed strike vol (at least front month) didn’t come in that much. But it easily could have.
I'd have to know more detail about the regressions you're assessing in order to comment. But to your last sentence, if you elaborate a bit more on your thoughts, maybe you'll get some pointers from the forum. You've already gotten several good comments from others that are food for thought. For instance, maybe you're exploring whether there's a trade you can arb depending on skew? Or perhaps you're exploring whether a change in skew can be used as a forecast of some other variable? There are certainly trades that can be constructed based on degree of skew (percentiles, etc), but whether they result in profit is another matter. And it's relevant to remember that changes in realized vol need not only be to the downside.For some reason when I plot RV-IV against the realized skew, I don't see the relationship you speak of. Instead, I see no relationship. I've seen other people mention the RV/r-skew relationship so I know it must be an error somewhere in my methods, but I'm not sure what I'm doing wrong. Any pointers?