Volatility skew

Mercury77 · Oct 1, 2005

Quote from DeltaDelta:

I am relatively new in options trading, and have found that especially the volatility skew is a major factor in the pricing of options.
I want to hear if anyone know of a piece of software that can show the volatility skew op an option in real-time. (an advanced excel sheet could suffice)
I am looking for something like this: http://www.softcapital.com/video.asp?en (click on volatility smile)

But the price of this software is out of my league, and I am looking for something with almost the same func. and preferably shareware, free

/Peter

DeltaDelta for what reason do you want to know the exact skew as a retail investor?

Profitaker · Oct 1, 2005

Quote from DeltaDelta:

Hello profitaker..
Is this DDE-sheet something you have developed yourself and might want to share ( I do not excel in more advanced excel)

I imagine that switching between stocks in Excel using DDE might be differcult, is that so.. I normally track 15-20 stocks.

DDE definition; http://www.webopedia.com/TERM/D/DDE.html
There are numerous providers of DDE.

Once you have the live price in Excel you calculate the IV using your model formule, and graph it. That then gives you a real-time IV smile.

Only (slight) drawback is that because IV can only be solved by iteration, it does take it's toll on the CPU (computer speed) and slows it down. One work-around (if you need it) is to use Excel manual calculation (F9) as and when you need an update.

IV_Trader · Oct 1, 2005

Quote from Mercury77:

Juding you by the answers you gave I see you dont understand a lot about implieds (not trying to offend you) . If you change time to expiration and use the same bid and ask offcourse you will get a huge jump In implied volatility especially for the shorter term options and especially if you are near expiration. Ever heard of the rapid time decay of atm options when you are close to expiration? From a market maker point of view implied volatility is not important at all if you are near expiration. Its just logical thinking and how much risk you are willing to take.

You completely missed the point of my post. If ( the key word) , the software provider will calculate the IV the way I described (and some providers do) , you will get a 20% skew between the Current and Next month. If you believe its a "real" skew , so let it be.

Mercury77 · Oct 1, 2005

Quote from IV_Trader:

You completely missed the point of my post. If ( the key word) , the software provider will calculate the IV the way I described (and some providers do) , you will get a 20% skew between the Current and Next month. If you believe its a "real" skew , so let it be.

skew is the difference in volatility of strike prices of the same expiration. You talk about the difference in volatility between different expiration months and thats not called the skew you can compare skew of different months tough and that can tell if the skew is expensive comparred to an other expiration month

IV_Trader · Oct 1, 2005

Quote from Mercury77:

skew is the difference in volatility of strike prices of the same expiration. You talk about the difference in volatility between different expiration months and thats not called the skew you can compare skew of different months tough and that can tell if the skew is expensive comparred to an other expiration month

I was obviously referring to the Time Skew(what does it calls?). What made you think that I was talking about Strike Skew in my first post ?

DeltaDelta · Oct 1, 2005

Quote from Mercury77:

DeltaDelta for what reason do you want to know the exact skew as a retail investor?

At least in Europe there are some arbitrage opportunities in options during the day. These are extremely difficult to see without using a real-time volatility skew, or an extremely advanced black-box program. The latter I can definetely not afford. Also I find it a lot more intuitive to look at the expirations this way instead of a huge grid.

I saw the program in action at a hedge fund I was visiting, so now I am trying to learn a bit more about this subject.

Mercury77 · Oct 1, 2005

Quote from IV_Trader:

I was obviously referring to the Time Skew(what does it calls?). What made you think that I was talking about Strike Skew in my first post ?

Because the OP talked about volatility skew and thats always the difference in implieds of the strikes of the same expiration. Thats almost impossible to trade for a retail trader without making it a directional play. Trading the difference in skew between expiration months is even more a market maker/professional option trader play.

Mercury77 · Oct 1, 2005

Quote from DeltaDelta:

At least in Europe there are some arbitrage opportunities in options during the day. These are extremely difficult to see without using a real-time volatility skew, or an extremely advanced black-box program. The latter I can definetely not afford. Also I find it a lot more intuitive to look at the expirations this way instead of a huge grid.

I saw the program in action at a hedge fund I was visiting, so now I am trying to learn a bit more about this subject.

DeltaDelta wanting to know about how the skew works and why there is a skew is a good thing! Trying to make money with it as retail trader without sufficient capital is impossible because its for a large part the hedging of the greeks wich can make you money. If you want to learn about options buy the book option volatility and pricing (Natenberg) it covers volatilit and skew and a lot of other things about option trading

IV_Trader · Oct 1, 2005

Quote from Mercury77:

Because the OP talked about volatility skew and thats always the difference in implieds of the strikes of the same expiration. Thats almost impossible to trade for a retail trader without making it a directional play. Trading the difference in skew between expiration months is even more a market maker/professional option trader play.

really? Hmmm , I am a retail and never placed a directional trade , but made money in options for the last four years (without ONE losing week). You are not so good with assumptions (not trying to offend you), are you? Are you one of those mighty MM/pros that you keep mentioning in your posts?

DeltaDelta · Oct 1, 2005

Quote from Mercury77:

DeltaDelta wanting to know about how the skew works and why there is a skew is a good thing! Trying to make money with it as retail trader without sufficient capital is impossible because its for a large part the hedging of the greeks wich can make you money. If you want to learn about options buy the book option volatility and pricing (Natenberg) it covers volatilit and skew and a lot of other things about option trading

I know Nathenberg, and I still read the book regularly, this includes the chapter about implied volatilities and the skew. Maybe in the first post I did not express what I was looking for clearly:
When you place a layer over the skew graph containing bars of bid/ask implied volatilies, you see the market in a very effective way. If there is a mispricing thus opening for arbitrage, you see this immediately at the specific bar; as an offset of the market skew.
I just looked at the video again, and I admit this is not what they are taking about, but if you look carefully you can see all the bid/offers in implied terms..

So - I know how skews work, now I am just looking for software tools