Robust Trading of Implied Skew
In this paper, we present a method for constructing a (static) portfolio of co-maturing European options whose price sign is determined by the skewness level of the associated implied volatility. This property holds regardless of the validity of a specific model - i.e. the method is robust. The strategy is given explicitly and depends only on beliefs about the future values of implied skewness, which is an observable market indicator. As such, our method allows to use the existing statistical tools to formulate the beliefs, providing a practical interpretation of the more abstract mathematical setting, in which the belies are understood as a family of probability measures. One of the applications of our results is a method for trading views on the future changes in implied skew, largely independently of other market factors. Another application provides a concrete improvement of the existing model-independent super- and sub- replication strategies for barrier options, which exploits a given set of beliefs on the implied skew. Our theoretical results are tested empirically, using the historical prices of SP500 options.
Code (0)
등록된 구현이 없습니다.
Similar Papers 제목 키워드 기반
Prices of Options as Opinion Dynamics of the Market Players with Limited Social Influence
The dynamics of market prices is described as the evolution of opinions in the trading community regarding future market behavior. The price then is a function of the voting process of the market players in favor to rais…
On the skew and curvature of implied and local volatilities
In this paper, we study the relationship between the short-end of the local and the implied volatility surfaces. Our results, based on Malliavin calculus techniques, recover the recent $\frac{1}{H+3/2}$ rule (where $H$ d…
The ATM implied skew in the ADO-Heston model
In this paper similar to [P. Carr, A. Itkin, 2019] we construct another Markovian approximation of the rough Heston-like volatility model - the ADO-Heston model. The characteristic function (CF) of the model is derived u…
Short-time asymptotics for the implied volatility skew under a stochastic volatility model with L\'evy jumps
The implied volatility skew has received relatively little attention in the literature on short-term asymptotics for financial models with jumps, despite its importance in model selection and calibration. We rectify this…
Model SelectionLocal volatility under rough volatility
Several asymptotic results for the implied volatility generated by a rough volatility model have been obtained in recent years (notably in the small-maturity regime), providing a better understanding of the shapes of the…