Has anyone tried to put on a skew or kurtosis trade ala Javaheri or Rebonato from the retail side? I'm wondering if these trades are practical only in the domain of the arbs? Although the positions themselves look like verticals or butterflies. Does anyone even know what the hell I'm refering to? http://www.amazon.com/Volatility-Correlation-Perfect-Hedger-Finance/dp/0470091398 http://www.amazon.com/Inside-Volatility-Arbitrage-Secrets-Skewness/dp/0471733873
I'd suggest the search function, as I am sure there are past threads that discuss this concept. There also many papers published online. Skewness and kurtosis are embedded in options. The distribution of underlying asset prices is the basis for a pricing model (or an assumption of what should normally exist, BSM). Fat tails and unimodal skewness can occur in reality, like in Index. I'll leave it to others to decide whether the skew/kurt implied in traded option prices will be realized.