Steep vol curve -> Negative Skew gamma?

Discussion in 'Options' started by curtains, Aug 6, 2007.

  1. curtains


    I have a question -

    It seems possible to create a situation where skew gamma for a contract is negative.
    Skew gamma (gamma, with vol taken into account)

    Scenario - Extremely steep call/put curvature

    - At the steepest point on the put curve, vol will be changing at a great rate with respect to price change. Because of this, a call with strike @ this point will have a skew gamma that may be negative. The reason is due to changes in vol outweighing any change in underlying price. IE, the price of underlying ticks up, vol decreases and skew delta also decreases (because of -ve skew gamma).

    The result: An upward move in the underlying, will cause the delta of a call to fall.

    This is possible to create, but how realistic is it? Should this be possible?

  2. are you asking if option can rise (or fall) more than a stock in real life ? If yes , it happened to my positions few times. OTM call on ALGN gained 1.30 while stock was up 1.10 due to gains of 2500bp in vols in one day.
  3. Happens all the time. Look at the calls in the SPX. Quite frequently since the skew in the SPX is so great, and there are so many strikes ( ie. their deltas are so close together) that calls in a particular part of the vol curve will either no move or go down in a move up in the underlying.

    Until the recent shift to higher volatilities, over the last 111 months or so you'd see that phenom many times.