Volatility Frown - When does this skew happen?

D

deltahedge

Hey everyone,

I was wondering when the volatility frown takes place. In this instance the ATM vol is greater than OTM put/calls. Someone mentioned that it happens with biotechs but I fail to see how that can occur especially since most skew graphs I've seen prior to an FDA announcement pretty much look like a goddamn smile as opposed to a frown.

Most traders I would imagine are looking more for leverage and would rather go for the OTM calls (or puts) as opposed to buying ATM if they think a huge move will happen to the upside or downside.
 
Quote from deltahedge:
----volatility frown....
----the ATM vol is greater than OTM vol....
----most skew graphs....look like a gosh darn smile....
More...
1) ?....In the event of an announced merger, the out-of-the-money options of the target company collapse with the expectation that the deal will be completed at the expected buyout price. That may produce a "frown". Some of the hardcore stock option guys and rocket scientists here may know differently.
2) Ever since the Crash of 1987, equity options have persistently had the "smile" skew. To be otherwise appears to defy logic and ignores the expereince of prior meltdowns. :cool:
 
Quote from nazzdack:

1) ?....In the event of an announced merger, the out-of-the-money options of the target company collapse with the expectation that the deal will be completed at the expected buyout price. That may produce a "frown".
More...

Yes, good example.

It would make sense that a well-defined binary event may produce a frown. Perhaps it is rare because many of these situations are not well-defined or truly binary.
 
volatility is a mad gamble sometimes.
but just gotta get out at the right time.
could work greatly to your advantage
if patient. :P
 
Quote from nazzdack:

1) ?....In the event of an announced merger, the out-of-the-money options of the target company collapse with the expectation that the deal will be completed at the expected buyout price. That may produce a "frown". Some of the hardcore stock option guys and rocket scientists here may know differently.
2) Ever since the Crash of 1987, equity options have persistently had the "smile" skew. To be otherwise appears to defy logic and ignores the expereince of prior meltdowns. :cool:
More...

Thanks for the insight Nazz. BTW why did you have to summarize my earlier post to make it "family friendly" we're traders who naturally have the mouth of a sailor :P
 
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