Seriously, I like this idea. I always looked at skew as a fixed percentage and that has some problems as you move across the term structure. This is a very interesting idea. Don't understand your comment about the 1:1 having offsetting gamma. Are you referring to the fact that your delta is going from negative to zero?
Sorry, disregard that. I was thinking about BS' correlation trade. I was up all night trading FX into some barrier expirations. Obviously they're not offsetting gammas as you're short everything.
even as you adjust by root time? e.g. sk10 = (iv(90%) - iv(100%))*sqrt(t) for a single asset it gives you a very consistent picture of the "term structure of skew" PS. using x-delta risk reversal normalized by ATM volatility is the other "cool" way
were you long the KO or short it? loads of fun either way (especially when you have a quarter-yard of KO a few ticks away)...
I was short the downside KO (DNT) in euro-gip. I could've slept, but the trend was ominous. Anyway, I shorted full notional at 8065 and earned on both. Went off this morning at NY fix. Of course you only hear of barrier hunting in the cross you're in. I am a friggin zombie right now. My friend benadryl is calling.
Being short KOs is always better - you can make a back envelope B/E calculation and short/long some spot. Long KOs suck - a couple times I got stuck just a few inches away from the barrier, it felt like a hot poker up my ass..
Yeah, often I'll sell a single KO and solve for a hedge that recovers half the debit on a touch. Not very sophisticated, but keeps the bet-sizing rational and I don't get whipped. My first substantial exposure (outside of retail) was fading a monster KO in $Y that boosted vols quite a bit. I shorted it and spot came within 5 pips. Also had hedged half my exposure and covered at 10 pips from the touch. Winner winner chicken dinner. Of course, needing the touch is no so comforting. I actually met the Thomson reporter and he said someone lost their job on that one; who knows, but was a good story. I don't think I've ever bought a KO to open a position.
Actually I've bought hundreds of fwd-start KOs, but always within 50 pips of the mkt. Edit: Regarding the Thomson "color" ... the trade was on IFR.