Hello, is there any possibility or strategy to profit just from a steepening skew? So that neither theta nor gamma/delta plays a role and you can capitalize just on the behavior of the skew (e.g. SPY, SPY skew). Thanks

I think risk reversal is the most direct way, delta-hedged, of course. So you buy OTM puts, sell OTM calls and delta hedge with the underlying.

@MTE Thanks for your help. Playing it with otm calls & puts and hedge it with the underlying (reversal) sounds good. Now I'll have a closer look at it.

Buy lower strikes and sell higher strikes at a ratio that makes you gamma neutral, then even up your deltas by buying/selling the underlying. Now you're long the skew and gamma and delta neutral. The ratio doesn't have to be 1 by 2 or 1 by 3 or anything even. Let the relative gammas of the two strikes dictate the ratio. Keep in mind that you won't stay gamma neutral as the underlying moves. When the underlying goes up, you will get short gamma. When the underlying goes down, you will get long gamma. That's advantageous btw because when the underlying goes up and you get short gamma you will also get short vega as, conveniently, implied volatility undoubtedly falls. As the underlying goes down you will get long vega which is nice because volatility will rise. You can take advantage of that phenomenon to "scalp out" of your position like this: when SPY goes up you will get short vega and volatility will drop. You can buy in your now-cheaper higher strike, realizing a profit and evening up your gammas and vegas. When SPY goes down you will get long vegas and volatility will rise. You can now sell some of your now-more-expensive lower strike, again evening up your gammas and vegas and realizing a profit. The downside of this whole approach is that since you paid a higher volatility for the lower strike, there is more theta in your long strike than in your short strike. So time works against you. One more thing to keep in mind - the closer you get to expiration, the more "unstable" the gamma neutrality of your position becomes. That is to say, the closer to expiration, the more your overall position gamma changes as the underlying moves. With a lot of time remaining, the gammas are very stable - your overall position gamma changes very little as the underlying moves. Within a week or two of expiration, the position gamma changes drastically with each move of the underlying and it becomes difficult or impossible to manage the position gamma neutral. And once the gamma neutrality is lost, the delta neutrality is lost as well

@DMO Thanks a lot for your detailed answer. I'm already looking at some examples to get a feeling of that strategy! Thanks

Dear DMO, Your detailed explanations are very valuable and very appreciated. It is clear that you trade options and you have an indepth understanding of greeks etall. Why not consider starting a thread on ET, where you take some of your time to outline the basic options strategy and greeks knowledge while discussing different positions. Kind of like real-time tutoring/lecturing thread. In my humble opinion, you will definitely throw a few gems in the process thus increasing the quality of ET. Also, if you so wish, after few months of free teachings, you might decide to open an options trading teaching service and I am sure (if your work is good) and you demonstrate it real time, you might end up with lots of paid subscribers. You might have a business in few months who knows!! Having said above, I just wanted to say that you are one of the very few people on ET who explain technical and practical things about options in a very clear way and you are very articulate also. Why not use it to benefit the community and maybe yourself also. Thanks.

Glad you found it valuable, and thanks for the kind words. I do teach some seminars at option prop houses for support personnel and trainees, which I like because nobody is expecting me to teach them a quick and easy way to make lots of money consistently with no risk. I've thought about teaching options for retail customers, but most of them ARE looking for a quick and easy way to make lots of money consistently with no risk. Seems there's no shortage of people willing to spend $3000 for a weekend seminar on covered calls. I wish to hell I didn't have a conscience! So I'm a little skeptical there's a market for what I would teach - that making money in options is a lot of work, that you have to understand deeply the volatility characteristics of the options you are trading (skew, month-to-month IV spread, etc.), that once you have a deep understanding of their "personality" and normal parameters look for anomalies and take advantage of them as they probably won't last. And I would teach the tools to monitor and evaluate these things and create and manage the strategies to take advantage of them. In other words, the greeks. In any case, I've created a couple of free educational videos at http://masteroptions.com/?p=3 and http://masteroptions.com/?p=82