skew risk

Discussion in 'Options' started by riskreward, Dec 27, 2006.

  1. Does anybody know of a way to measure skew risk between front and back months? I mean the risk that front month vol will deviate significantly from back month vol...
    All I could find out is that is much more likely in individual equity options than index options.
  2. IMO, it isn't a matter of whether you can measure it. The big problem comes in trying to anticipate it. If you're with a decent broker it is easy enough to do a simply VEGA analysis to figure out win/lose scenarios. The question is, "Can you predict the skew?"
  3. Raver


    What if you could predict the skew would decline or rise? What would be the best setup to exploit? buying a couple of strikes? or 1 strike which is deviating the most?


  4. RAVER------It would be a little better to do some type of spread-position instead of an outright-position. You're focusing on relative volatilty movement, not absolute volatility movement. If you believe the skew will steepen or flatten, consider doing a calendar spread or some type of diagonal spread that is approximately dollar-weighted between the two strikes.
  5. Raver


    Thanks Nazzdack, with 'approximately dollar-weighted between the two strikes' you mean a vega neutral position?
  6. RAVER-----That's right. As a rough guideline, if you buy ~$1,000 of premium at one strike price , you can expect to sell ~$1,000 of premium at another strike and maintain proper neutrality. As a disaster control mechanism, try to buy your premium farther out-of-the-money than the short premium. If the market melts up or down, the extra contracts on the long leg will save you. The position would resemble a "backspread".