CBOE Skew value is one of the highest since 1990. Current value of the skew is 146. Any significance to these numbers? Obviously text book definition says tail risk is increasing, but it is increasing since last year.
Nice. Observation. While I can't see it as a possible general market indicator. It would be great if someone can provide a backtesting of a trading strategy. Selling weekly calendars for the next month or so would a nice start.
I assume this is based on the VIX contango. So, I would be shorting vol. I have no fancy theories, but it's a start.
One idea to monetize steep skew is Convexx's Pitchfork. I think steep skew is caused by lot of buying puts by big boys. In most cases when they are hedged market goes up because there no fear of downside from my opinion
I can't model it right since I am in the field. Could you explain how the pitchfork works? Is it more than a ratio calendar ratio? I saw an example. Sell 1 call front spx Sell 3 put back spx
From atticus thread, if i remember right. Take ATM straddle value, currently $40 for spx for october expiry. Then subtract from current value of 2010 and go one strike OTM from that. So sell 1 1965 call and 3 1965 put for the same expiry Current mid price for 1965 SPX PF is 82 credit
So the trade is structured as a variance trade with the straddle component and the 2 extra puts add a long directional play that benefits from further decay in volatility. The delta exposure is probably similar to a covered call or short put but has more short vol exposure. Brilliant! This could become a staple trade for me. Any other structures?
Here is my thread: http://www.elitetrader.com/et/index.php?threads/trading-option-pitchforks.244704/ You're looking to solve for the far(thest) down and out put*4 which is > 2*atm straddle. That's the short-hand on the trade as currently constructed. Then you trade the 3x1 combo or the short spot x short 4 lot puts. This is really a port-margin trade, or FOs. There is a bit more to it, but that's a good start. It may be difficult to source a short in HTB names, so use the natural in those instances. The synthetic (spot x 4) is better on microstructure. The natural doesn't require a calc to quote in a sheet using mids, but is less reliable. Quote the synthetic in sheets or the natural in your front-end. It's not a cake-walk even with the exaggerated smile as the vol-line is critical, but you can augment/hedge with deep ITM puts. Solve for the (same-day) short-strike expectancy when choosing a DITM long-premium hedge. Do not add to gamma-exposure. A vomma and speed play.
The skew (locally, vol at strike) can be used to represent the likely vol-line should spot trade to strike. You should structure your forecast with your forward-look of Px so that your vol-figure exceeds the vol at strike, but the figure can be used for processing.