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Monday's Market Muse - day after...

  1. or few days :)
    It is interesting what Paul pointed about behavior of Put Skew this days when market drops. I didn't check yet if this is the case today but assuming it is real tendency (it may seems like more and more trades are placed far OTM ) makes me wonder: isn't it that models using CEV predicts flattening of Skew? If so it looks like CEV may just add more error to calcs than help in this case. Is that right?
     
  2. IMO there is no model that can predict what the p/l is going to be of any trade going forward. I looked at one of the trades I have on. Yesterday at the EOD it was at -6.58 deltas and the p/l was -120. when I looked at what the p/l would be with the SPX at 2309.75 I found that the p/l would look like this:
    Raw T-0 line = -156.00
    with volatility surface checked = -47.00
    also adding CEV = -85.00

    If I increased the vols 1 point:
    Raw T-0 line = -379.00
    with volatility surface checked = -323.00
    also adding CEV = -46.00

    My actual p/l on the trade at the EOD today = -175.00
    As you can see none of those predictions came close to what was reality. It has been my experience that no one has the ability to accurately predict what the forward p/l pricing of a complex options trade will be.
     
  3. Yes, I agree about unpredictability - to a degree...
    My point was, or rather question, that what suppose to improve BSH model, namely vol adjustments, in scenario where Skew get steeper with market dropping, brings more harm than helps.
    Skew predictions and skew modeling and it usefulness is another story. Best way (for me) is not so much relay on them but rather learn to use them and trim expectations.
    I'm still not quite sure if my view on CSV is correct.

    And skew did get steeper today...
     
  4. I am probably not the person to respond to your question then. I do not put much stock in using volatility surface or CEV calculations as a way to better know what is going to happen in the future. And from what I could see today the put skew did not go up very much, if compared to historic data. Today is the red line:
    Current skew.JPG
     
  5. Of course. I'm not trying to predict future but to learn a little more about model.
    With my trading I put more attention to what is going on the market in nearest past and one of my models shows that Put Skew did steepen (see pic).
    My question is still open. Did CEV incorporates flatter Skew with market going down?
     
  6. Marcas:
    Curious.. Can you elaborate on your X-Axis on that "screenshot"?
     
  7. SPX as % OTM.
     
  8. Here is regular.
    This is 18 Aug 2017 expiration at 11:30 AM
     
  9. Because I cannot explain exactly how CEV works in relation to the skew I am hoping that someone else can chime in. But based on the results that I posted earlier you can see the projected p/l with the CEV turned on showed that when the vols were increased the p/l would have a smaller loss than without the vol increase so my guess is that it is modeling for a flatter skew.
     
  10. Got it! I like {prefer} (still scratching my head however) observing Moneyness as the X-Axis, which your view reflected. "Removes price action from the view"