1/ Saturday thread ๐งต- Skew
Gm everyone! I bailed on the thread last week because I was on holiday, but today I am back and I want to briefly cover "skew".
Lets get into it. ๐
Gm everyone! I bailed on the thread last week because I was on holiday, but today I am back and I want to briefly cover "skew".
Lets get into it. ๐
2/ To understand skew, you first need to understand volatility. So go back to my threads on the gamma bands, or vega if you need a refresher.
3/ Individual options trade with their own individual volatility. So when we talk about skew we are talking about the difference in volatility between an OTM (out of the money) Put and an OTM Call.
4/ Here is a simple example. If a 20d put is trading at a higher IV than the 20d call, then volatility is "skewed" to the downside.
What does this mean? Well practically it means option insurance buying, bearishness, or simply strategies that involve more Puts than Calls.
What does this mean? Well practically it means option insurance buying, bearishness, or simply strategies that involve more Puts than Calls.
5/ You can just think of it as there being more demand for Puts than Calls. Easy.
In the example below I have highlighted the 20-ish delta bid IV for Calls 94.62% (on the left) and Puts 92.2% (on the right.) It looks similar but the Calls are a bit more expensive than the Puts.
In the example below I have highlighted the 20-ish delta bid IV for Calls 94.62% (on the left) and Puts 92.2% (on the right.) It looks similar but the Calls are a bit more expensive than the Puts.
6/So in the example above IV is skewed to the upside.
Is there an easier way to find this information and can I see it graphed historically?
I'm glad you asked, and the answer is yes.
Is there an easier way to find this information and can I see it graphed historically?
I'm glad you asked, and the answer is yes.
7/ The graph below was built by @laevitas1. It tracks 25d put-25d call / ATM IV, simply known as 25d skew. Check out that spike we had on sept 7th as people piled into puts. ๐
8/ So how do you use this information? I'm not going to go deep because it would take forever. I'll just say, maybe you see that puts are getting a little expensive vs. calls. So maybe you sell the put and buy the cheap call. If vol is mean reverting this should work out.
9/ Here's an example, we can see that whenever skew gets up near the 20 range it stalls out and reverts. (This is a short timeframe so you would have to do your own research. I'm just using this as a quick example.) ...
10/ So like I said, when Skew hits 20 I would sell the expensive put, collect the premium, and buy the cheap call. Skew then decreases (in the chart you see it drop to -10-ish), which means Put IV is decreasing and Call IV is increasing.
11/ If you read my thread on vega, you would know that when you sell a Put you want IV to decrease, and when you buy a call you want IV to increase. So in our example the trade is going as planned. Both the value of our Put and Call are increasing.
12/ Ok, there are a few things you can do from here, but for today I am going to leave it at that.
But at least now you know that skew is simply the difference between Put and Call IV's at certain deltas. ๐
But at least now you know that skew is simply the difference between Put and Call IV's at certain deltas. ๐
13/ As always, feel free to chime in my friends.
@TraderSkew @tztokchad @samchepal
@PowerTradeHQ @laevitas1 @Mtrl_Scientist @dopex_io @DeribitExchange @qblockz @PowerTradeHQ @macrohedged
@TraderSkew @tztokchad @samchepal
@PowerTradeHQ @laevitas1 @Mtrl_Scientist @dopex_io @DeribitExchange @qblockz @PowerTradeHQ @macrohedged
14/ Ps. Sorry of any spelling/grammar mistakes. I'm rushed this morning. Lot's of adulting to do with the wife (home depot and such.) haha
Btw, if you want to talk about #btc, defi, options, #solana or anything to do with crypto. Check it out ๐๐ป
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