How far off can the kinks get? 1 vol, 2 vols at most. I would be surprized if it is ever really greater than 1 vol. But I haven't traded the Kospi much and that not in a long time.
These kinks happen quite often in /ES options. Just watch the skew curve for the front months for a few minutes and you'd probably be able to see them. How are the strikes fungible? Would love to hear how its done if you don't mind sharing. Thanks.
I assume you are meaning the index options and not the options on the futures. I never noticed any real kinks. In fact my curve fitters always worked really well for the spx because there were so many strikes. Single stocks were different because strikes were wider and liquidity was much worse. I mean that the market makers only view the options as a basket of risks (delta, gamma, vega, rho, mu, wisoo, etc). So if someone is buying the 1150 put in size, they will view the 1140 put as also being bid up. So the whole curve will move up appropriately.
Yes, but I don't understand why this is? Unless you could somehow replace the 1150 put synthetically with the 1140 put when demand for the 1150 is increasing, what would be the purpose of upping the IV of the 1140? I'm not doubting that what you're saying is true, because I think it is true. I've seen the curvature of the skew curve change quickly and then revert back a few seconds later, but I'm trying to understand why this is so. Thanks.
Of those baskets of risks the one the market makers cares the least amount is delta because that is very easily hedgable. Therefore, the marketmaker doesn't really care if an option expires in the money or out of the money. He cares how it gets there (the realized vol). When you start looking at options this way, the 1125 put and the 1150 put are very similar if you are sufficiently far from maturity. For a 1-2 month option they are very similar. For a 1 week option they are much more different (because the risk profiles are very different). The reason the skew curve can change quickly is that when a large block trade is negotiated, it done so via phone calls and funny hand symbols. Once the clearing price has been determined it must be crossed on the exchange. However it must be crossed within the confines of the market. So if the market is 45 at 46 and the clearing price is determined to be 48 for 10,000 calls. Then the market makers must move all their offers to be 49 so that the 10,000 can print at 48. After it is printed, the market reverts to 45 at 46. This could be some of the spikes you see.