Right on rosy , like always. The only time I put the skew trade ( long vertical) is on the day of report. And only if short (lower) strike volty is 1000 bp > long
We are building our own tools. Rarely do you find trading tools/software available off-the-shelf that does what you need. The good tools are developed in-house and kept there. That is why you are seeing computer scientists partners/co-founders at trading firms. Traders on this sight see all these strategies written up in technical papers, and they are good. But these papers assume that the strategy is implemented over many many options and that capital is plentyful. IMO, many of these strategies should probably only be attempted by very well capitalized, experienced traders, that have an in-house programming/quantitative support team. If you do attempt it, play small, take it slow and be cautious. If you do find an anomaly, traders only get rewarded if they are intelligently fearless. Good luck. nitro
Agreed. And I'm not talking about dispersion trading, which everyone agrees is not for retail traders. But if you're successful trading options it's probably because you figured something out for yourself, which means no off-the-shelf software is going to crunch the options and display the info just the way you need. That's why I'm partial to Excel spreadsheet add-in packages such as Hoadley, which allow you to design options spreadsheets and display the info however it best suits you.
dmo, could you please clarify one last thing for me? What is it that you call a "volatility skew anomaly"? I would think that the presence of a volatility skew is an anomaly in itself, isn't it?
An anomaly is anything that differs from the norm. In index options - the SPY for example - the IV of each strike is always lower than that of the strike below and higher than that of the strike above. So the lower the strike, the higher the IV. That relationship holds true day in and day out. So by my definition that's not an anomaly, it's the norm. Now imagine that in a moment of extreme bullishness there's a mad rush to buy OTM calls, causing the normal skew relationship to reverse. Suddenly the higher strikes are trading at higher IVs than the lower strikes. This is an anomaly and highly unlikely to last. So if you buy lower strikes and sell higher strikes - and manage the position more or less delta and gamma neutral until the normal skew reasserts itself - you would make money. The above is an extreme example for purposes of explanation only, so please don't hold your breath waiting for it to happen. The index skews are actually quite rigid, and don't change much at market tops or bottoms. A more likely place to look for such anomalies is stocks that reflect natural resource values such as mining stocks, USO, GLD, etc., which can have fairly "pliable" skews.
Cross your diametric-outliers on your long gamma/vega book. If your weighting is robust it should have limited-impact on your short gamma/vega book. That's the meat of dispersion trading. Obviously it's best to position during the reporting season.