best structure to exploit flat skew

Discussion in 'Options' started by Baozi, Jul 17, 2019.

  1. Baozi


    Hi all,

    as per title.. I would like to ask your enlightened opinion about the best structures to use when the skew is as flat as a surf board.

    I was thinking about 1-2-1 symmetric flies, or the iron equivalent. Is there anything more creative than that?
  2. Robert Morse

    Robert Morse Sponsor

    What is you expectation for the direction of the symbol and during what time frame. IMO that is more important that the current skew.
    tommcginnis likes this.
  3. Baozi


    Hi Robert, in my specific case I am bearish and I am looking at a 45 DTE option chain.

    Putting up a fly with so long time to expiration basically means that I would be waiting forever before it turns a profit, hence my question about more efficient structures.

    So I guess the question becomes: I am bearish, and I am looking at the 45DTE options which currently show flat skew. I am expecting skew to return normal in 1-2 weeks. What would be the best structure to take advantage of this situation?
  4. Robert Morse

    Robert Morse Sponsor

    I'm not sure with a just OTM put why the skew matters unless you do not want to buy a put spread because the OTM puts are not skewed higher. If it were me, I would start with a small long put position and build from there.
  5. Baozi


    The put captures my bearishness and that's fine, however how do I capture my expectation of the skew reverting to normal? That's the conundrum.
  6. destriero


    A flat surface is generally a signal to short vol (index). In SN? Yes, any vertical.
    Adam777 likes this.
  7. Baozi



    Edit: Could it be single name?
    Last edited: Jul 17, 2019
  8. If you're bearish, then you probably think vol is going up. Selling a 1 X 2 DN OTM put ratio would make big money if IV is low and it breaks like you think. But like someone mentioned earlier, a flat skew sounds like the ATMs are trading high.

    A extra wide Butterfly or Iron Butterfly is your best trade if IV is high. Buy OTM wings, sell ATMs if vol is high.
    thefuturestrader likes this.
  9. Baozi


    Yep currently I have on a wide fly centered a bit below the atm level.

    I don't understand however the ratio for ratios (pun intended), isn't that supposed to be a structure that you use to take advantage of high skew?
  10. Yes. When put skew is steep and vol is high (a somewhat rare combo but happens), buy 1 put strike, and sell 2 further out put strikes.

    If vol is low and skew is flat (an even rarer situation), do the opposite, especially if you're bearish (bullish vol)....maybe even sell 1 and buy 3 for same IV levels.
    #10     Jul 18, 2019