i think it’s the cost of doing business.
Are you on the sellside if you are running such a diverse book?
Skew delta quick and dirty?
- Thread starter MrMuppet
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i think it’s the cost of doing business.
Are you on the sellside if you are running such a diverse book?
When it comes to smile dynamics, what I’ve noticed (in regards to currency options at least) is the use of ATM, the 25D risk reversal, and the 25D long fly. The difference in IV in the OTM put and call indicating the amount of skew in the smile.
The butterfly spread allows one to gauge the probability of larger moves.
long fly = long convexity along the smile curve.
The the fly has Volga which is why it’s preferred over the strangle (both has same Volga, unlike straddles = 0 Volga). Lower premium, 0 delta, Vega partially netted.
no idea if this applies for futures options, though.
but it’s always those 3 when measuring skew delta.
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.
or long an ATM dynamically hedged risk reversal (short OTM put/long OTM call).
spot goes up = +Vega
The OTM long call is closer to ATM thus having more Vega than the farther OTM sold out. Thus the calls value rises more than the puts will fall.
can you just price risk reversals across the chain and see this in real-time?
or what about Dest risk on pitchfork?
Yes and no. I run a global relative value book, most of is is either direct replication or riskarbs but recently I went into vol trading, too. Depending on skew it's sometimes advantageous to spread a risk reversal against a futures contract instead of spreading two futures...but a fence is a bitch to manage
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Dude, thanks for the reply. I'm started toying with 25d fly and the 25d fence as indicator but have found it easier to just fire up a 3D surface chart^^
I guess I have to make use of these more to draw any conclusions from them. At least in theory it makes a lot of sense.
What do you mean riskarb and skew? Are you trading skew on merger names?
If risk reversals are a proxy for futures (where you are trying to pick up some premium edge) then sticky delta should be small compared to your delta pnls.
skew dynamics only matter when you run big isolated risk: like 300k of Vega in skew is equal to 100k of atm outright Vega. And 100k of outright Vega is like 10mm of delta - if you get my comparison.
If risk reversals are a proxy for futures (where you are trying to pick up some premium edge) then sticky delta should be small compared to your delta pnls.
skew dynamics only matter when you run big isolated risk: like 300k of Vega in skew is equal to 100k of atm outright Vega. And 100k of outright Vega is like 10mm of delta - if you get my comparison.
I hear you. Staying with this examples of fence vs futures the main risk is that you have basis risk as well as skew delta.
Let's say you're long underpriced basis via fence and short overpriced via futures. You don't hedge anything skew or vol so your jackpot is a strike touch at expiration and the basis on the futures leg deflated.
What if you're correct with your basis and skew bets but the market is down. You're down or at least you don't win as much because the touch is to your long strikes.
You never really can be neutral in a risk reversal but for me it's imperative to at least know how much P/L is depending on skew, vol, basis, spot.
Sometimes you see a trade and think it's the golden one...until you realize that you juke yourself by neglectin higher order risks.
I don't know why this would matter but I'm testing right now...full size will not be a lousy 100 lot
You've lost me on some of your terminology.
what do you mean by basis? Are you referring to futures vs spot basis (ie interest rates and dividends?)
what do you mean by fence?
what do you mean by riskarb? The traditional meaning of riskarb is merger arbitrage (trading the probability of corporate deals complete - which is the exact OPPOSITE of arbitrage, but i digress).