skew risk

R

riskreward

Does anybody know of a way to measure skew risk between front and back months? I mean the risk that front month vol will deviate significantly from back month vol...
All I could find out is that is much more likely in individual equity options than index options.
 
Quote from riskreward:

Does anybody know of a way to measure skew risk between front and back months? I mean the risk that front month vol will deviate significantly from back month vol...
All I could find out is that is much more likely in individual equity options than index options.
More...

IMO, it isn't a matter of whether you can measure it. The big problem comes in trying to anticipate it. If you're with a decent broker it is easy enough to do a simply VEGA analysis to figure out win/lose scenarios. The question is, "Can you predict the skew?"
 
What if you could predict the skew would decline or rise? What would be the best setup to exploit? buying a couple of strikes? or 1 strike which is deviating the most?

thanks

raver
 
RAVER------It would be a little better to do some type of spread-position instead of an outright-position. You're focusing on relative volatilty movement, not absolute volatility movement. If you believe the skew will steepen or flatten, consider doing a calendar spread or some type of diagonal spread that is approximately dollar-weighted between the two strikes.
 
Thanks Nazzdack, with 'approximately dollar-weighted between the two strikes' you mean a vega neutral position?
 
RAVER-----That's right. As a rough guideline, if you buy ~$1,000 of premium at one strike price , you can expect to sell ~$1,000 of premium at another strike and maintain proper neutrality. As a disaster control mechanism, try to buy your premium farther out-of-the-money than the short premium. If the market melts up or down, the extra contracts on the long leg will save you. The position would resemble a "backspread".
 
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