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Arbitrage between implied and realised spot-vol beta

Let's say there is a discrepancy is the market with respect to implied spot-vol beta (implied skew) and the actual beta of ATM vols with spot. Let's say Put vol > Call Vol but the atm vols are ...
volquant's user avatar
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0 answers
38 views

Taking skewness into account when determining daily expected ranges

I use a method to determine daily expected ranges by combining both daily IV and daily realized vol. with different weights to get the expected range, and it worked pretty accurately. However I want ...
c.m.'s user avatar
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Impact of Skew on Bermudan Swaptions

I'm trying to understand the impact of different skew assumptions on the pricing of Bermudan swaptions, e.g. 10NC1 struck at K%. It is often stated that the price of the Bermudan depends primarily on ...
David's user avatar
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Summarizing the Volatility Skew as a Single Number

Related questions to this topic/subject: Expressing Volatility Smile as One Number Volatility skew and how to capture it? In both posts, the authors/respondents recommend using the second derivative ...
KaiSqDist's user avatar
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2 votes
1 answer
284 views

Options related factors forecasting cross section of returns

I came across this research paper that shows that skewness derived from options surfaces can help explain the cross section of returns. https://pubsonline.informs.org/doi/10.1287/mnsc.2015.2379 Are ...
helloimgeorgia's user avatar
1 vote
2 answers
347 views

Infer implied volatility skew/smile from implied distribution

My question is closely related to the answer of @LocalVolatility and his blogpost. I am trying to reproduce his first figure and I am struggling with the implied volatility. With the help of $$ f(S) = ...
HJA24's user avatar
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0 answers
51 views

Forward Skew using constant smile rule

IV1 = IV of far month. IV2 - IV of near month. f(1,2) = Forward volatility between the two expiries. dx = difference between Strike volatility and ATMf volatility of IV2 column. As per the method ...
smg_08's user avatar
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1 answer
855 views

Smile Skew and Convexity Exposure

We're all familiar with the Greeks (Delta, Gamma, Vega, etc.). They provide a quantified exposure to various risk factors. But what about skew and convexity? Is there a similar standardized way to ...
Socrates231's user avatar
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2 answers
231 views

Assessing the value of risk reversal and the fly

This is important for traders. What I'm really asking is how do we ascertain if vanna (or dvegadspot) is being valued correctly by the market? and for the fly, fair fly value will be a combination of ...
Danny's user avatar
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1 answer
290 views

Trading term structure of skew

Is there a way to trade IV skew between two maturities? For example, bull put in near maturity and bear put in far maturity.
smg_08's user avatar
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1 answer
107 views

Calendar spreads under black scholes world

If IV skew is flat (all strikes with the same IV ss ATM) as in the black-scholes world for all maturities, would calendar spreads be considered as pure arbitrage?
smg_08's user avatar
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Simple short rate model that generates ZCB skew

Which is the simplest short rate model that generates ZCB vol skew ? I want to use it afterwards and do simple "on paper" qualitative development about its dynamic(I don't need a model I can ...
stackoverflower's user avatar
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115 views

Risk-neutral density versus put-call skew and open interest

I've been experimenting with the Breeden-Litzenberger formula in Python based on some code obtained here: https://github.com/robertmartin8/pValuation/blob/master/ProbabilisticValuation/...
SuperCodeBrah's user avatar
1 vote
1 answer
2k views

Calculating skew for an options structure

I am trying to figure out whether an options structure is short or long skew without just having someone tell me the answer. I'd like to calculate the number myself. Assuming I am creating a risk ...
helloimgeorgia's user avatar
4 votes
1 answer
329 views

Does skew flatten with a decline in volatility?

In Trading Volatility by Bennett, he says: If there is a sudden decline in equity markets, it is reasonable to assume realised volatility will jump to a level in line with the peak of realised ...
Jerry Quin's user avatar
6 votes
3 answers
2k views

Is variance swap long volatility of volatility?

In JPM's note on variance swaps, on page 29, they say "... a long variance swap is also long volatility of volatility". In Bennett's book Trading Volatility, on page 115, he says "... a ...
Michael's user avatar
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1 answer
342 views

Simple Black-Scholes alternatives

I work at an accountancy firm and we use Black-Scholes to value equity in private companies that has option like features. The equity we typically value is akin to deeply out of the money European ...
AdamCooper's user avatar
2 votes
0 answers
287 views

Implied volatility skew decay over expiry

I seem to remember the implied volatility skew of European options decreases as the expiry increases. It is true for the Heston model under some approximation. What are the good references that prove ...
Hans's user avatar
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What does it mean to "sell skew to buy vol"? [closed]

A bit confused here. Skew can mean so many different things. It can mean the different IVs along the strike axis (sometimes called vertical skew), can mean the IVs along term structure (sometimes ...
A.L. Verminburger's user avatar
2 votes
0 answers
152 views

Vasicek Model: smile dynamics

I have come across the statement that the Vasicek model cannot be used to price skew / smile sensitive products: i.e. it cannot be calibrated to replicate a skew or smile. Why is that? My guess is ...
Conductor's user avatar
3 votes
2 answers
585 views

How do market-makers profit & manage inventory when customers sell a lot of deep OTM options?

In a live example: Today is June 14, 1 hour before market close, and \$SPY (S&P 500 ETF) is currently at \$372.28 and the June 15 \$350 strike Put is being quoted for \$0.13 on the bid and \$0.14 ...
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0 votes
1 answer
166 views

implied vol smile relative to atm vols

Am I correct in saying that most stochastic vol models are meant to behave in a way that as atm vol goes up the smile comes down and risk reversals become "less stretched?" - by that i mean ...
Macro RV's user avatar
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162 views

Is there a modified Bachelier's futures spread option model with adjustments for skew and kurtosis?

I'm looking at pricing a very large deal and while the distribution is kind of "normal," there's quiet a bit of skew and kurtosis that isn't being considered when I use the normal Bachelier'...
Matt's user avatar
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1 answer
267 views

BKM risk neutral moments in python

I am trying to compute the BKM implied moments (Bakshi, Kapadia and Madan 2003) in python by following this paper: Neumann, Skiadopoulos: Predictable Dynamics in Higher Order Risk-Neutral Moments: ...
des224's user avatar
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2 votes
0 answers
361 views

Skew of implied volatility and skewness of returns distribution

Is there a link between those two quantities ? I think about this because, the skew of returns impacts the price of calls and puts, and therefore may be linked to the implied volatility
Kupoc's user avatar
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2 votes
1 answer
226 views

Confusion with the equity option skew

In general out of the money (OTM) equity options have higher implied volatility (IV) than at the money (ATM) options. So assuming we have two put options (5% OTM and 10% OTM). Skew reveals that 10% ...
TRex's user avatar
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0 answers
291 views

Clarity regarding Skew adjustment for binary options

I am reading the section on Skew adjustment for binary options on wikipedia (https://en.wikipedia.org/wiki/Binary_option#Skew) and am trying to get my head around it and gain some intuition. First ...
Oscar's user avatar
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1 vote
2 answers
310 views

Approximating Volatility Skew From historic returns? [closed]

I was wondering if someone could help me with something. I've been reading more about equity options, and I'm struggling with skew. Conceptually I understand why it exists, what I'm struggling with is ...
Pewter City's user avatar
0 votes
0 answers
672 views

Spot-Vol covariance and risk reversals

I have been looking into the covariance between log spot returns and log IV returns over a variety of tenors and lookback windows. However I am not sure how these numbers relate back to the outright ...
Surface Trader's user avatar
2 votes
0 answers
1k views

What is a skew swap?

I'm watching a video where hedge fund manager Cem Karsan describes the basics of his strategy as a "skew swap". I understand that he's buying/selling index options at different maturities to ...
Alex's user avatar
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1 vote
0 answers
3k views

What does it mean to be long the skew?

Consider an equity option such as SPY and I'm long the skew, do I make money if puts raise in price and calls decrease or the opposite?
Alex's user avatar
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1 vote
3 answers
8k views

What is better: A negatively skewed return or a positively skewed returns distribution?

I noticed that in certain literature, like in CFA level 1, the theory put forth is that someone should prefer positively skewed returns as mean > median > mode. But why is that? Based on a ...
Kai's user avatar
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1 vote
0 answers
139 views

Adapt SABR Hagan/Obloj model from swaptions to treasuries options

I am a young intern in a brokerage company and I am currently working on developing a new pricer. I would like to encode a skew-visualisation tool and the best way that appeared to me is the SABR ...
Leos's user avatar
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1 vote
0 answers
48 views

When is the effect of skew most potent for an early exercise option?

Let us say I have a Bermudan option which I can terminate at 3 possible dates. When can I expect the discrepancy between a local vol and a stochastic vol model to be highest (assuming both are ...
Arshdeep's user avatar
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1 vote
1 answer
214 views

Modelling Skew when using ARMA Time Series

I am currently modelling financial time series via ARMA processes, but I have reason to believe that in addition to significant autocorrelation, the time series also exhibit skewness. Is there a way ...
Hans-Peter Schrei's user avatar
1 vote
0 answers
191 views

3 pairs, FX options, implied vols

I am trying to undertand the relationship between EUR/JPY options and USD/EUR and USD/JPY options. Vol(USD/EUR) = $S_1$, Vol(Usd/JPY) = $S_2$, Vol(EUR/JPY) = $S_3$ The actual Vol follows: \begin{align}...
Abrag's user avatar
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18 votes
1 answer
5k views

Bergomi: Skew arbitrage

In his paper "Smile Dynamics IV" (https://www.fields.utoronto.ca/programs/scientific/09-10/finance/derivatives/bergomi.pdf) as well as in his book "Stochastic Volatility Modeling" (...
Volwiz's user avatar
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1 vote
1 answer
95 views

Alternative low-moment measure of skewness

$$ \widehat{\text {Skew}}_{i, t}=\frac{3 \cdot\left[\hat{\mu}_{i, t}-\operatorname{median}\left(r_{i, d, t}\right)\right]}{\hat{\sigma}_{i, t}} $$ is called Low Moment Skewness by Baltas and Salinas (...
develarist's user avatar
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0 votes
0 answers
155 views

Why approximating dSigma/dS with dSigma/dK changes the ATM volatility at twice the rate?

I'm referring to the paper "Delta Hedging With a Smile", Sami Vahamaa (2004). It mentions: By approximating ∂σ/∂S with ∂σ/∂K, it is assumed that as S changes by one unit, there is a ...
Hiperfly's user avatar
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5 votes
2 answers
5k views

What is "implied skew" and "spot/vol beta"?

I saw a chart which showed implied skew and spot/vol covariance (I assume) and I was wondering what these terms actually mean and how to "back them out" of Option prices or vols? Here is the ...
user avatar
6 votes
1 answer
2k views

At-the-money forward implied volatility

I'm new here. I was wondering what the well-known ATMF implied vol approximation mentioned on page 2 in Bergomi Smile Dynamics IV: $$S_T = \frac{s_T}{6\sqrt{T}}.$$ I cannot find any reference about ...
JuniorQuant's user avatar
1 vote
0 answers
121 views

Terminology : definition of skew for a volatility smile

Is there a generally accepted definition of skew for volatility smiles? Is skew always defined as $$ \frac{\partial{\widehat{\sigma}(K,T)}}{\partial{K}}, $$ where $\hat{\sigma}:[0;+\infty)\times[0;+\...
fwd_T's user avatar
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1 vote
1 answer
107 views

Determine the error term of SKEW-calculation

I am trying to recreate the CBOE's SKEW Index in Python. I need to calculate the errors terms that are adjustment terms for the differences between the atm strike ...
HJA24's user avatar
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2 votes
0 answers
175 views

CBOE Skew Index Intuition

I was recently reading (and very much struggling to understand) the CBOE white paper on their Skew Index (CBOE Link), I thought it might be useful as I'm trying to better understand volatility skews. ...
user3002540's user avatar
1 vote
2 answers
369 views

What are some heurestics you could use to judge if skew is cheap or expensive? If any?

Are there rules of thumbs/models that you could use to develop intuition for when skew is cheap or expensive? From what I gather, volatility is a number that is backed out of price in a sense, "the ...
user3002540's user avatar
1 vote
0 answers
116 views

Dupire Vomma and Stochastic volatility

Suppose that you are short an option on asset $X_t$ following a pure diffusion. Suppose you are hedging your position using (Dupire) Local volatility model. Suppose that the option is concave with ...
DeepInTheQF's user avatar
4 votes
2 answers
329 views

A PARADOX? - relationship between risk reversal (slope of vol smile) and digital price

how do we resolve this seeming paradox? lets take GBPUSD now: it has a negative risk reversal, ie putvols > call vols , because traders expect spot to fall, so they are buying puts, pushing their ...
Randor's user avatar
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4 votes
2 answers
3k views

How does volatility skew change with underlying spot?

We know that generally ATM implied vol is negatively correlated with the underlying spot for equity indices, i.e. implied vol goes up when spot moves down. Therefore I wonder if there are any ...
CABLE's user avatar
  • 443
1 vote
1 answer
1k views

Delta Skew Measure as volatility changes

I'm reading Trading Volatility (Colin Bennett) and there's a phrase regarding delta skew measure on p. 208 that I don't quite understand: An example of skew measured by delta is [25 delta put - 25 ...
bpt7594's user avatar
  • 11
3 votes
0 answers
121 views

Robust bounds or approximations on implied volatility skew when $\lvert \rho \rvert \rightarrow 1$

Are there any robust / non-parametric results for pure stochastic volatility models, in terms of bounds or preferably accurate approximation, for the implied volatility skew $\partial IV(k) / \partial ...
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