Skew you! :-D

Hi guys and gals,

I am trading options for 1–2 years now. Started out with Cash secured puts and covered calls. Nowadays, I am trading vertical credit spreads for the most part and sometimes iron condors.
I am mostly focusing on uncorrelated ETFs/equities that have high IV and that I have a directional opinion. For strategy, I am doing (quite conservatively) 30-40 dte 15-11 credit spreads. (I read the Options Traders Hedgefund and really liked it)
Since I want to trade more Iron condors (and additionally it should help me set the width of the spread) I want to focus more on skew.

I understand that it is advised to check the skew of lets say the next three monthlies and see how the IV of f.e. the 15 delta puts relates to the atm put.

Firstly, I need my broker to show me that. They just show me the comparison for one strike price but not delta related (but that is an issue on its own :-D I am with IBKR).

Secondly, I am not sure at which point a skew is viewed as flat or steep. Are there generally accepted percentages, or does it just relate to the past ratio?

Thank you very much and kind regards
Matache

 

you can compare skew for each delta against spy skew
what are the etfs that you trade? Commodity etfs? Most equity etfs are highly correlated . As are a lot of stocks

 

Yeah I try to keep correlation as low as possible by also trading GLD or TLT. But sure, SPY and QQQ and to some extend also IWM are strongly (0.6 to 0.7 I think) correlated.

 

Other ideas for less (or even negative) correlation?

 

There is also a CBOE index for skew with ticker SKEW or ^SKEW etc.: https://finance.yahoo.com/quote/^SKEW?p=^SKEW

See also https://en.wikipedia.org/wiki/SKEW :
"
SKEW is the ticker symbol for the CBOE Skew Index, a measure of the perceived tail risk of the distribution of S&P 500 investment returns over a 30-day horizon.[1] The index values are calculated and published by the Chicago Board Options Exchange (CBOE) based on current S&P 500 options market data.

SKEW is similar to the VIX index, but instead of measuring implied volatility based on a normal distribution, it measures an implied risk of future returns realizing outlier behavior. The index model defines such an outlier as two or more standard deviations below the mean, which would characterize a black swan event or market crash.[2] The index value typically reflects trading activity of portfolio managers hedging tail risk with options, to protect portfolios from a large, sudden decline in the market.[3] A SKEW value of 100 indicates the options market perceives a low risk of outlier returns; values increasing above 100 reflect an increased perception of risk for future outlier event(s).

See also

• Skewness risk
• Taleb distribution
• Volatility skew

"

 

Thank you very much for taking the time to reply! That was very helpful!

 

if you are trading 15 - 11 delta putspreads, i don't think skew will matter.

 

Thank you. It is more important for iron condors and (atm) iron butterflies, isn't it?

 

nah. It’s important in ETF’s if you run large Vega positions. (Like 20k a side of a risk reversal against 1mm)

 

What do you think of SPY, GLD, XLE, EEM and TLT as 5 ETFs that are not too much correlated? Any other ideas on Etfs with liquid options (and share prices > 50 USD) that are not too correlated to SPY? QQQ and IWM are too correlated and BITO f.e. is too cheap (commissions take up too much of the profit per contract) and liquidity is not too strong in this one too.