Volatility Skew
- situation where individual options on a particular entity have different implied volatilities that form a pattern
- the pattern can be a positive or negative skew
Positive Skew (forward skew)
- higher strikes, higher IV
Negative Skew (reverse skew)
- lower strikes, higher IV
Horizontal Skew
- long term options with lower IV
- because longer term options have uncertainty of future news
If skew is (+) and IV is Low Percentile --> Put Backspread
If skew is (+) and IV is High Percentile --> Call Ratio Spread
If skew is (-) and IV is Low Percentile --> Call Backspread
If skew is (-) and IV is High Percentile --> Put Ratio Backspread
Credits: https://www.optionstrategist.com/blog/2013/03/volatility-skew-information
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