Questions tagged [volatility-skew]
The volatility-skew tag has no usage guidance.
84
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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 ...
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3
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752
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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 ...
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2
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1
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213
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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 ...
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0
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157
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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 ...
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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 ...
2
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0
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118
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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 ...
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2
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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 ...
user46424
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1
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135
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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 ...
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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'...
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162
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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: ...
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102
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May banks ignore the vol surface for far OTM, distantly-dated options, and make risk decisions only on near-term implied ATM vol?
Here is a difficult "real-life" skew / surface options problem that actually occurred. Please help me judge its validity or falsity.
In 2018 a Chinese communications stock was falling, and ...
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201
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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
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2
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1
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182
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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% ...
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103
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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 ...
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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 ...
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403
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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 ...
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0
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738
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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 ...
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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?
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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 ...
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0
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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 ...
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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 ...
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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 ...
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110
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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}...
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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" (...
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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 (...
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110
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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 ...
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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 ...
user46424
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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 ...
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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;+\...
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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 ...
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0
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148
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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. ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
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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 ...
user34971
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2
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599
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What are popular metrics for Option Skew?
What are popular metrics to track skew? Would it be the difference between OTM option and ATM option IV? Would it be a percentage difference in IV?
Also, if both are valid, would a % change be ...
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Forward Volatility vs Spot Volatility in Option Skew Models
My question is regarding Volatility Skew Models and their inputs. I have noticed that a vast majority of models take as an input the forward of the underlying (even in the case of stocks - where the ...
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Measuring implied move priced into an event
It's well known that options price in an expected move in the underlying going into events, such as earnings announcements. I currently measure this implied move by computing the forward variance ...
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Practical Skew Model For Equity Options?
I'm looking for a simple model I can use to calibrate equity implied volatility surface. There are several models published in the literature, and most of them seem far too sophisticated for my ...
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Why Jarque - Bera values are so high? Is this normal? [closed]
Please advise whether the following is a normal occurrence:
In the above table I have Autocorrelation at lag1, LB, Skew, Kurt and JB test.
I have noticed that whenever the value of Kurt increases, ...
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Fitting Gatheral's SVI model
I was considering using Gatheral's formula for fitting option skew. In the specific (commodity) market that I am concerned with, the underlying is ca. at 50, and typically 5 integer strikes left and ...
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Fitting Function for Skew
I am faced with having to fit skew/smile to option quotes with different strike and same maturity. In order to keep things reasonably simple and to avoid potential artifacts from fitting higher order ...
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Variance swap volatility - ATMF vol, Skew and Curvature
In a pure diffusion setting, it is a well known result that the volatility $\sigma_T$ of a fresh-start variance swap of maturity $T$ as seen of $t=0$ verifies
\begin{align}
\sigma_T^2 &= \Bbb{E}_0^...
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Produce volatility smile/skew with G2++ model
Suppose I have a G2++ short rate model:
$$r(t)=x(t)+y(t)+\phi(t), \quad r(0)=r_0$$
with
$$dx(t)=-ax(t)dt+\sigma dW_1(t), \quad x(0)=0$$
$$dy(t)=-bx(t)dt+\eta dW_2(t), \quad y(0)=0$$
$$d\langle W_1,W_2\...
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Volatility surface fitting, interpolation and extension from sparse data
There are some nice papers about constrained spline fitting essentially giving you a smoothing and arb free surface. I am focusing on the oil market here: The market is essentially split in a very ...
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How skew in vertical put spreads change the payoff?
An spx four strikes wide Put Spread from at the money has a payoff ratio of 1 to 2 meaning if the Premium on the spread is \$10 your reward is \$20; yet the corresponding Call Spread with the same ...
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2
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581
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How do you factor in skew when assessing implied volatility for a non-atm option?
If you think volatility is too cheap, how do you decide if an ATM call or an upside call (which trades at lower vol because of skew) is better?
Let's say you have a $100 stock. You think the stock ...
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Trying to understand Strike Adjusted Spread, can someone explain using a simple example?
I should start by saying that I am not a quant, I am someone interested in options but I perhaps lack the mathematics background to always follow along. I recently stumbled upon a terrific article ...
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