Skew delta quick and dirty?

[MrMuppet]

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).

ah, got you now

Basis is futures vs. spot, yes

Fence is just a RR with another option added...sell call/buy put/sell put. Similar risk profile.

For me a risk arb is everything that includes trading two instruments against each other that have the same cash flow but have different higher order risks under the hood.
For example an OTC EURUSD forward rates vs 6E futures spreads. Zero risk on paper but substantial risk in reality.
Or perhaps less opaque for some: Spreading a BTC carry trade vs treasuries
The most tricky shit though are two products with different settlement processes like physically settled products vs stuff that settles in cash on a different day. There are a lot of plays around this but you better don't fuck up

 

[newwurldmn]

ah, got you now

Basis is futures vs. spot, yes

Fence is just a RR with another option added...sell call/buy put/sell put. Similar risk profile.

For me a risk arb is everything that includes trading two instruments against each other that have the same cash flow but have different higher order risks under the hood.
For example an OTC EURUSD forward rates vs 6E futures spreads. Zero risk on paper but substantial risk in reality.
Or perhaps less opaque for some: Spreading a BTC carry trade vs treasuries
The most tricky shit though are two products with different settlement processes like physically settled products vs stuff that settles in cash on a different day. There are a lot of plays around this but you better don't fuck up

i see. So the skew delta is actually a big deal as that’s going to be a significant part of your pnl (since you are exploiting the “under the hood”).

 

[MrMuppet]

i see. So the skew delta is actually a big deal as that’s going to be a significant part of your pnl (since you are exploiting the “under the hood”).

yeah, exactly.
Don't get me wrong, I'm not looking for a rule of thumb to evaluate my position. That's done with analysis software since I've sometimes so many positions on that it would be impossible to analyse them by hand.

But I'm a bit paranoid when it comes to software outages that I always carry my current position around with me that I print on a piece of paper each day before I shut down my computer...and it would be nice to be able to look at it and somehow eyeball the risk that is coming out of skew without using software...just in case

 

[Same Lazy Element]

yeah, exactly.
Don't get me wrong, I'm not looking for a rule of thumb to evaluate my position. That's done with analysis software since I've sometimes so many positions on that it would be impossible to analyse them by hand.

If you just want back of the envelope, it is your vanna * sk10 * 2

 

[MrMuppet]

If you just want back of the envelope, it is your vanna * sk10 * 2

Makes perfect sense and is sufficient as a backup. Many thanks, Sir!

 

[.sigma]

But I'm a bit paranoid when it comes to software outages that I always carry my current position around with me that I print on a piece of paper each day before I shut down my computer...and it would be nice to be able to look at it and somehow eyeball the risk that is coming out of skew without using software...just in case

wow, has outages ever occurred before where it cost you a lot of monies?

 

[.sigma]

“That’s the danger of buying vol here, especially in the VIX, where you have an artificial curve based on absolute levels of volatility. Lots of times you see manipulation on the curve on settlement day.

I look at ATM vol I look at twenty delta risk reversal, which would be the twenty delta put over the twenty delta call, and I also try to determine what the skew is. Right now I don’t think it pays to be long vol into the summer months. Cyclicality says we’re going to be slow here. If I had to be long vol I would love to be long vol in China, Singapore as a proxy for China, the Nikkei, and definitely in the in through some kind of synthetic calendar, long back spread/short delta.” - riskarbdownprufconvexxatticusdestriero

Excerpt From
Traders of the New Era
Fernando Oliveira

 

[MrMuppet]

wow, has outages ever occurred before where it cost you a lot of monies?

They occurred, but I'm always neutral so they did not cost a lot. Nevertheless it's always good to be prepared

 

[Saion]

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?

Do you know any software that calculates vanna exposure, lets say and updates it using shadow delta assumptions?

 

[MrMuppet]

Do you know any software that calculates vanna exposure, lets say and updates it using shadow delta assumptions?

not that I know of unless you get into prop stuff like itivity which