21 lines
1.3 KiB
Plaintext
21 lines
1.3 KiB
Plaintext
Vertical Skew
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The second type of skew found in option IV is vertical skew, or strike skew.
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Vertical skew is the disparity in IV among the strike prices within the same
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month for an option class. The options on most stocks and indexes
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experience vertical skew. As a general rule, the IV of downside options—
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calls and puts with strike prices lower than the at-the-money (ATM) strike
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—trade at higher IVs than the ATM IV. The IV of upside options—calls and
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puts with strike prices higher than the ATM strike—typically trade at lower
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IVs than the ATM IV.
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The downside is often simply referred to as puts and the upside as calls.
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The rationale for this lingo is that OTM options (puts on the downside and
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calls on the upside) are usually more actively traded than the ITM options.
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By put-call parity, a put can be synthetically created from a call, and a call
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can be synthetically created from a put simply by adding the appropriate
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long or short stock position.
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Exhibit 3.5 shows the vertical skew for 86-day options on Citigroup Inc.
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(C) on a typical day, with IVs rounded to the nearest tenth.
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EXHIBIT 3.5 Citigroup vertical skew.
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Notice the IV of the puts (downside options) is higher than that of the
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calls (upside options), with the 31 strike’s volatility more than 10 points
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higher than that of the 38 strike. Also, the difference in IV per unit change |