Thx Nazz. This makes sense. I guess I kinda thought interest rates or currencies could "panic" in either direction. (they do but your answer makes sense). So we get sort of a reverse skew in the grains and ags? This makes sense to me also. . Thx for your answer. Have a good weekend. jimQuote from nazzdack:
1) Financial commodities; i.e. stocks, bonds and currencies tend to "panic" to the downside. People can be desperate to buy put-options. They also tend to have active covered-call writing which "depresses" call option values.
2) Physical commodities; i.e. grains, metals and energies tend to "panic" to the upside. People can be desperate to buy call-options. That gives "steepness" to the skew for those options.
trading skew
- Thread starter johntsai90
- Start date
The dynamics of the skew in rates differ somewhat from those in other asset classes, but ultimately it's a matter of a) lower bound on rates; b) shifting fundamental balance between supply and demand for protection. For example, at the moment there's lots of demand from relatively price-insensitive investors for various structures that force the dealers to buy high-strike payers (puts) on 10yrs. This makes the skew very steep.
There's all sorts of interesting stuff in various rates mkts at the moment that is related to people expressing a view on what the "right" shape is...
I completely disagree... I don't know much about stocks, but what you describe is most certainly not the case with bonds and ccies.
Firstly, a panic would imply a bid for safe assets, such as govt bonds (you can observe that relatively easily). That means bonds actually "panic" to the upside. Secondly, for FX, the direction of the panic would obviously depend on the particular pair. For example, AUD and MXN would move in opposite direction, given the quoting conventions. Finally, the shape of the skew in neither bonds nor FX has anything necessarily to do with covered call writing.
Yep, I'll be crying myself to sleep tonight, for sure, thinking of this cruel blow to my fragile ego...Quote from nazzdack:
I "get" it. You're upset that jim c complimented my answer and not yours.
You have yerself a nice w/e, nazz!
