Assume that I know where IV of a particular strike option will be in the next x days(T+x) relative to the current day(T). What are the efficient strategies to trade this with and without having an opinion on the direction? Example: on T day IV of 17500 call =16.84 on T+2 da IV of 17500 call = 14.79 PS: I'm looking for option-only strategies.
Imo there really are no efficient strategies to monetize skew movements, unless they are extreme and it's also capital intensive if that's the only thing you're trying to do. Unless you have another related position already on that you can lean your skew view against for a cheap hedge or something you are usually going to end up carrying some kind of risk to try to make money off skew shift, and the PnL is not going to be that large vs. the margin and the variance of the other risks. Just try to pull up a single expiry and position around a skew view. If you think 10d call skew will steepen you can short 1 ATM and buy 2 call wings. Vega neutral-ish structure will earn on the steepening. However you have some deltas to hedge now, and you are locally short gamma. Your skew shift needs to out-earn those effects. Say some meme stock has wings at 2x ATM vol and you know it will drop eventually. Well you buy some local vol on the surface and to get vega neutral you need to be net short wing lots; subject to jump risk. The skew is there in the first place because it's not easily isolated. Pretty much it's payment for the associated risks. The change of skew IV's as time passes is usually kind of obvious. On the index as you go into expiry and the deltas on the puts decay, the implied vols will rise. Or say an news event is approaching, same thing IV's are 100% going to go up. Well if you want to inventory that you are going to be paying theta. And where are you going to offset that cost? Good pnl on isolating skew is always going to be a relative value position. You need to get both parts of the position right in order to earn big on skew that's not as easy.
From the graphs it seems like you were trying to profit from the 17.5k strike IV drop, not really an IV skew change. The strike IV drop is usually correlated with the direction. For an index, strike IV drops as index goes up. So you actually have an opinion on the direction. Why not place some directional trades that would also benefit from an IV drop?
It may be wise to quantify the accuracy of your IV projection, prior to pursuing ability to profit from it! -- If you "knew" the IV at a future point in time, you can code best solution finders! -- That is the easy part!
If you are going to trade skew in a meaningful way,you cant be short the wings.. In my world,it's typically some sort of fly structure,balanced or not... It typically boils down to the trade being somewhat directional in nature with a bit of theoretical edge.. And then there's the Sticky Delta/Sticky Strike implied bet
Theoretical edge comes from Orats,and in particular their metric D%..Im going to ask Matt to chime in,but here's a quick discussion https://www.elitetrader.com/et/threads/what-is-iv.361608/page-16 I tend to trade alot of shorter dated OTM flys,split flys and operate under a sticky strike format..If there's no "edge" under that assumption,I tend not keep my size smaller
This is what I'm leaning towards. Trading some directional OTM ratioed flys(e.g. 132 call fly). But what I'm observed is T+0 profit line goes against me when the market moves towards the body and it takes a lot of time to make some profit.
Thanks for the pointer. I tried to look up what D% is about but couldn't find a description.. @Matt_ORATS, do you have a link?