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2
votes
1answer
39 views

Evaluating trading strategies by the skewness of returns

How to deal with skewness of returns when evaluating different trading strategies? More specifically, I'm back testing different strategies to be implemented as an automated black box strategy. While ...
5
votes
2answers
119 views

Why is a variance swap long skew?

I can appreciate the mathematical derivation, but can anyone explain this in a more intuitive sense? I often come across the mistaken belief that due to the replicating portfolio being long more ...
1
vote
1answer
47 views

SKEW Index as parameter in lognormal distribution

The CBOE publishes a SKEW index, which is SKEW = 100 - 10*S, so from the index itself we can get S = (SKEW - 100)/10. I just ...
0
votes
1answer
54 views

volatility skew for lognormal model is flat?

Does anyone know why the volatility skew for lognormal model, such as BK, should be a flat line, meaning that implied black volatility for options will be same for those with different strike prices? ...
0
votes
1answer
104 views

Does the fact that volatility is not constant imply existence of skew?

I had a question regarding the existence of the volatility skew. I've tried researching it a fair bit and I come across a few different explanations: 1. Market participants like buying downside puts ...
4
votes
1answer
135 views

Understanding skew of SPX - Why does IV of OTM puts increase with strike?

I've been trying to understand the skew I see when looking at the skew of SPX. Here is a snapshot today from thinkorswim. I understand why IV increases for ITM puts -- namely because there is a ...
2
votes
3answers
227 views

Why can't you arb skew by buying options with low implied vol and selling high implied vol in the same month and dynamically hedging?

there's something I've been trying to understand for a while now and I just can't quite understand with regards to skew. In the same month, why can't you buy a option that have low implied vol on the ...
0
votes
0answers
41 views

Impact of Implied skew variations on future prices

I want to test the relationship between of the oil implied volatility skew and oil future prices. I'm lost regarding the method to test the relationship. I was thinking about a regression but I'm ...
0
votes
1answer
98 views

How do I track implied volatility of specific delta?

I'm a newbie with respects to volatility trading and options. I recently purchased a book on the topic called "Trading Implied Volatility -An introduction" by Simon Gleadall. It's been one of the most ...
1
vote
1answer
157 views

Skew in Black Scholes model

We are modeling Foreign exchange rates using Black Scholes model given below: $$F_{t}=F_{t−1} + (r_d−r_f)F_{t−1}dt + \sigma F_{t−1}dW_t$$ Where: $F_t$ and $F_{t−1}$ are FX rates at time $t$ and $t−...
0
votes
1answer
75 views

Why vertical skew is same for puts and calls

What is the reason that the vertical volatility skew graph(decreasing IV as the strikes increase) is the same for the puts and calls? The loose explanation is because of put call parity, but I am not ...
2
votes
1answer
628 views

Black Scholes - how to calculate delta with a vol skew

I am trying to calculate the delta of an option at different strike prices where the underlying has a pronounced implied volatility skew in order to correctly hedge an options strategy. Researching ...
0
votes
0answers
315 views

Calibration Problem in the LMM-Skew (Shifted Diffusion) Model

I have implemented the LIBOR market model (LMM) and I am quite satisfied with the results. I have now added a skew to the model as described in 10.1 of Brigo/Mercurio. That is, I have replaced the SDE ...
1
vote
1answer
107 views

Why doesn't VG flatten volatility skew for short term options?

The VG process, from my inexpert point-of-view, seems to nearly perfectly model equity distributions. For longer term options, there is little to no volatility, skewness, or kurtosis parameter skew. ...
2
votes
3answers
229 views

Why are short expiries associated with more pronounced volatility skews?

I've noticed that for a given strike price, the shorter expiration dates of options have more pronounced volatilities why is that?
1
vote
0answers
469 views

Interpolate option volatility in delta space in R

I have a bunch of deltas and option implied vols at those deltas. I would like to interpolate them in R. Interpolating them in delta space seems difficult, since normally you would like the ATM calls ...
3
votes
1answer
595 views

Why does Skew measure remain more-or-less constant for Listed Expiries?

I have looked at the Variance Swap Papers published by GS-VarSwap and JPM-VarSWap where they talk about approximation to VarSwap strike using ATMF vol and Skew (slope of the volatility skew for 90-110 ...
12
votes
1answer
3k views

Skewness and Kurtosis under aggregation

Returns possess non-zero skewness and excess kurtosis. If these assets are temporally aggregated both will disappear due to the law of large numbers. To be exact, if we assume IID returns skewness ...
8
votes
1answer
514 views

Option Portfolio Risk - Volatility/Skew - practical implementation

I'm trying to improve my methods for calculating real-time US Equity option portfolio risk. My main problem is volatility "stability" across all strikes in an option series. The current ...
9
votes
1answer
1k views

How should I estimate the implied volatility skew term when calculating the skew-adjusted delta?

I'm trying to come up with the implied volatility skew adjusted delta for SPY options. I'm working with the following formula: Skew Adjusted Delta = Black Scholes Delta + Vega * Vol Skew Slope. I ...
13
votes
2answers
1k views

Is there a popular curve fitting formula of options skew vs strike price or vs Delta?

I was trying to build a options trading/optimization system. But it often gets more inaccurate as it scans through the far from ATM options because, you know, options skews. That is because I did ...
13
votes
5answers
10k views

What is the implied volatility skew?

I often hear people talking about the skew of the volatility surface, model, etc... but it appears to me that a clear standard definition is not unanimously in place among practitioners. So here is ...