Skew term structure

Discussion in 'Options' started by kapw7, Sep 23, 2012.

  1. kapw7

    kapw7

    In theory skewness should decay with time since for long enough periods the distribution should become closer to normal. There is also an empirical law of skewness decay by sqrt(T). There's a lot more interesting and juicy stuff on this but way over my head.

    So I am testing this on SPX data taking as skewness measure PUT(95)-Call(ATM) for 30days up to 1y. (The data is from ivol and from their interpolation but should be OK for this purpose? )

    The results seem to be varying a lot. A lot of days not only the power law is not holding but it seems that the decay is inversed at 180/360days ie skewness starts to increase at around 180 days (you get a U curve)

    Does this show some risk premium that would be possible to trade, eg with a calendar - sell the 1year RR buy the 3month?