Skew delta quick and dirty?

M

MrMuppet

So if you for example trade a risk reversal or a fly you're exposed to skew delta asumed sticky delta.

If you want to stay neutral, you have to account for skew delta by either over- or underhedging.

We all probably run fancy software that allows to shock the book and view the surface over different scenarios.

Let's say you don't have this at hand, is there a quick and dirty approximation of how the P/L in your book changes with spot up and down?
 
MrMuppet said:
So if you for example trade a risk reversal or a fly you're exposed to skew delta asumed sticky delta.

If you want to stay neutral, you have to account for skew delta by either over- or underhedging.

We all probably run fancy software that allows to shock the book and view the surface over different scenarios.

Let's say you don't have this at hand, is there a quick and dirty approximation of how the P/L in your book changes with spot up and down?
More...


Use ATM deltas within local vol (inside 30D strikes). So you've got the following -30D, ATM, +30D strikes at 20, 17, 14 vols. Assume a 20 line on the bear touch, 17 line on the bull touch and calc your delts. Obv you're going to have movement on the strips to contend with, but for a basic eyeball it will work well enough for sizing.
 
yeah...a bit too dirty :)
Lets say you bought ATM puts for 20 vols and sold 25 delta OTM calls for 30 vols you're long skew delta.

When spot moves towards your short strike you gain 10 vols plus you also gain some vols as the put moves OTM asuming skew is symmetric.

Vice versa you lose when spot goes down since OTM calls gain more IV than the former ATM put as they move up the surface.
If you want a pure skew play (i.e. OTM IV going down) you have to short more spot to account for that effect so position delta isn't sufficient
 
I trade 100 lots on index from my phone while camping so I am good with dirty. It's a quicky to eyeball size. Practically, I trade smaller when i don't have access to my sheets. These aren't skew locks we're trading here.
 
For "dirty", seems like you answered your own question..
That's pretty much what I do/did(spreadsheet),but I place very little value in it,nor do I run a shadow Delta to adjust..

Seems like I NEVER make the P and L I hope to assuming sticky strike scenarios...

I pay far more attention to my Delta potentially exploding/imploding given implied vol exploding/crushed.



Imho,it borders on




MrMuppet said:
yeah...a bit too dirty :)
Lets say you bought ATM puts for 20 vols and sold 25 delta OTM calls for 30 vols you're long skew delta.

When spot moves towards your short strike you gain 10 vols plus you also gain some vols as the put moves OTM asuming skew is symmetric.

Vice versa you lose when spot goes down since OTM calls gain more IV than the former ATM put as they move up the surface.
If you want a pure skew play (i.e. OTM IV going down) you have to short more spot to account for that effect so position delta isn't sufficient
More...
 
taowave said:
For "dirty", seems like you answered your own question..
That's pretty much what I do/did(spreadsheet),but I place very little value in it,nor do I run a shadow Delta to adjust..

Seems like I NEVER make the P and L I hope to assuming sticky strike scenarios...

I pay far more attention to my Delta potentially exploding/imploding given implied vol exploding/crushed.



Imho,it borders on
More...

thanks for the reply. Well, I pretty much run a vol arb book and I analyse it via software where I have all the higher greeks as well as up and down gamma/vega

However, I asked myself what if I don't have it because it crashes or I'm not on my desk and need to make a quick adjustment.

For me it's pretty easy to adjust up/down gamma and up/down vega since it's pretty intuitive and you can derive it off of the option chain itself.
But skew delta is a pain in the ass since it moves with skew. So it's possible to derive it from the chain if you only have two strikes e.g. vol difference times vega, but I have a couple of hundred strikes and terms :)
 
Quiet1 said:
You're not happy to use your total delta, total vega and an estimate of dVol/dSpot?
More...
hm...not really. I've fallen on my face so much by bucketing exposure. I don't trade equity options only futures options. So I prefer to think in term buckets at least since there is substantial basis risk in my trades.

I've read somehow that you can decompose a portfolio of European vanillas into a sum of digital options and call options...but I have no idea what this means as I've never touched exotics
 
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