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"Use combined call/put skews" in OptionVue or not ?

Discussion in 'OptionVue Forum' started by TheSpeculator152, Jan 31, 2016.

  1. TheSpeculator152

    TheSpeculator152 Well-Known Member

    Quite a lot of traders use John's recommended vol model settings of "Use combined call/put skews" in OptionVue. My understanding is that the only reason one would want to combine them is for stock options that are less liquid whereas for index options, that are much more liquid, modeling the calls/puts separately should be more accurate. Do you know why John recommends a combined approach to call/put skew modeling?

    [img=http://s30.postimg.org/drl6qbad9/Combined_Skew.jpg]

    If you choose to model the skew curves separately you get different deltas and hence you would select different strikes versus using John's recommended settings.

    How have you configured OV? My thinking is to use John's recommended settings for his systems and use separate modeling for the stuff I'm trying to develop on my own.

    What are your thoughts?
     
    Last edited: Feb 1, 2016
  2. GreenZone

    GreenZone Well-Known Member

    John Locke has always recommended combining call and put skew, and continues to do so today.

    As it appears you may have already noticed, the skews of puts and calls are quite different, especially when you get big moves up or down.
    In the past, I decided to do my own set of backtests and compare the accuracy of combining call/put skew vs not combining them.
    I found that I had slightly more accurate results of P&L when not combining call/put skews.

    John Locke created all of the guidelines for his trades by having combine call/put skew turned on.
    Note that deltas will shift across the entire chain when you combine call/put skews.
    Therefore, if you wish to follow John Locke trades strictly by his original guidelines, such as hitting a particular adjustment point based on the position deltas, then I would suggest that you stick with having combine call/put skew enabled.

    On the other hand, if you have understood the main concepts that he teaches in the trades, and are therefore happy to make your own determination of when and how to adjust the trade based on what the greeks are saying and the shape of your T+0, then in my opinion, you'll have slightly more accurate projections by turning off combined call/put skew when trading the main indexes.
     
  3. Kevin Lee

    Kevin Lee Well-Known Member

    John explained his reason for combining Call/Put IV isn't really about maximizing accuracy but rather to get a stable T+0 profile. By that he means if the Call/Put skews are separate, the T+0 line tend to be more unstable when market moves around and causes a shift in IV skews.

    I think I understand what he's getting at. Since none of the software out there is completely accurate in their modeling, we choose something that is more consistent. That's because even if something is inaccurate but as long as it is consistent, we can then work around the inaccuracy.
     
    RayM and Capt Hobbes like this.
  4. Philip

    Philip Member

    Has anyone lately looked into not using combined Put/Call skew in OV? Given how inaccurate OV's default settings are at the moment (I and D), I have been exploring whether it makes sense to finally cut the idea of combining the skew when trading a strategy such as the M3.

    As an M3/SPX trader, I have the luxury of trading the most liquid instrument, option-wise, in the world so the notion of combining Put/Call skew to get more accurate Greeks makes little sense. I get it for illiquid stocks or maybe even for something like a less liquid index. The SPX options trade more than 2m contracts per day so the accuracy of the Put IV should be pretty up to date / even in fast markets.

    When uncombining, I find that I get about 2/3 of the negative Delta I have with the combined setting check. The t+0 line also jumps round less.

    Thoughts?

     
  5. Paul Demers

    Paul Demers Well-Known Member

    Based on my experience with OV I have found that trades like the M3 style trade manage better with call/put checked when outside the expiration tent on the upside. When trading trades that were designed to be inside the expiration tent then I would not check the put/call setting. I prefer to do all my current trades with it unchecked when using OV. What matters is what setting you used when designing the trade. If you are trading a trade that someone else designed it is a good idea to back test it with the settings/software that you are using to verify that the original guidelines will still work.
     
  6. Steve S

    Steve S Well-Known Member

    I rarely use OVue anymore but when I was using it for M3s with iron flyes it was a no-brainer: OVue was often scary wrong - just WRONG, not different - unless "combined" was checked. With "combined" checked it was in the ballpark of my own analytics and everyone else's. Other CD posters have said the same thing.

    Regarding liquidity of SPX and so on, this issue is not about liquidity - it's about OVue's really bad analytics. So the "iron fly test" will just show one symptom of the underlying disease which might pop up in ugly ways with any position.
     
  7. DavidF

    DavidF Well-Known Member

    I trade SPX iron fly/M3s and I have to check the box to get close to the equivalent all-put equivalent. Agree with Steve S, not an issue with liquidity, it´s accuracy of OV. If you trade an all-put BF with calls as hedge it´s not as much as an issue as a iron BF but still affects it. All-put BWBs are least complicated when it comes to accurate delta values on OV IMO.

    I also find the "variable" setting deltas are too negative and get hit on down moves. Jim Riggio frequently mentions that even using TOS/EIOIO he knows the downside is underestimated by the model, and that model is less neg. delta than variable. I
     

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