NP. I was going to try to answer your question for you, but I'm not a quant and didn't want to confuse anyone with misleading info. However, almost every professional options trading company uses their "model" to paramaterize an underlying distribution per expiry. They then take this distribution, and run it through a binomial tree method to create TV's--this is particularly useful in estimating early exercise value in American style options. They then back out implied vols per individual option using black/scholes. You are simply trying to do this in reverse. You will still need a "model" to analyze the market assumptions implied by the distribution, otherwise this is just a fun math project. What are you using? Some type of quadratic function? Also, there are ways to analyze the implied vol curves, which will have similar (if not identical) results to comparing implied distributions between expiries.
JS - Is is correct that the exercise of modeling is more frequently used by firms such as MMs which are required to hold some book into expiration? As an advanced retail trader, I've been studying the skew and distribution to better understand market action, however when it comes down to reviewing my traded position, I still have not been able to find a large gain by using more than the position greeks (including shadow delta, delta bleed, vola adjusted gamma, and weighted vegas). I would really like to perhaps take my management to a higher level, or potentially a more mathematical level but am struggling to find usable crosses between theory and action. Best, RE
hey, that's really helpful actually... what I really want to know is if I can identify a discrepancy in the statistical-skew (tails) and kurtosis of logarithmic returns than the market it implying. I would still use BS... but if there's a more simple way to trade skew/kurtosis I'm game.
Sorry for jumping in late in the thread here. I'm trying to take my trading to a higher level too, by incorporating implied distribution of skew, and taking maximum from vanna and vega convex positions. At this juncture, I have the same question as you do. Do you know any software that helps me monitor shadow deltas using anchor delta assumption with spot-vol movement changes? I was trying excel, but haven't found progress. May be I need to try better. Any thoughts?