21 lines
1.5 KiB
Plaintext
21 lines
1.5 KiB
Plaintext
in the strike price is higher for the downside options than it is for the upside
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ones. The difference between the IV of the 31 strike is 2 full points higher
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than the 32 strike, which is 1.8 points higher than the 33 strike. But the 36
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strike’s IV is only 1.1 points higher than the 37 strike, which is also just 1.1
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points higher than the 38 strike.
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This incremental difference in the IV per strike is often referred to as the
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slope. The puts of most underlyings tend to have a greater slope to their
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skew than the calls. Many models allow values to be entered for the upside
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slope and the downside slope that mathematically increase or decrease IVs
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of each strike incrementally. Some traders believe the slope should be a
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straight line, while others believe it should be an exponentially sloped line.
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If the IVs were graphed, the shape of the skew would vary among asset
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classes. This is sometimes referred to as the volatility smile or sneer,
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depending on the shape of the IV skew. Although Exhibit 3.5 is a typical
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paradigm for the slope for stock options, bond options and other commodity
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options would have differently shaped skews. For example, grain options
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commonly have calls with higher IVs than the put IVs.
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Volatility skew is dependent on supply and demand. Greater demand for
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downside protection may cause the overall IV to rise, but it can cause the
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IV of puts to rise more relative to the calls or vice versa. There are many
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traders who make their living trading volatility skew. |