Most option traders know that puts trade for more than calls – this is called “skew.” Dr. Data (Michael Rechenthin, PhD) is here to visualize this for a more thorough understanding and to introduce you to the Skew Index. Dr. Data began with the distribution curve of market moves – the market has had larger down moves than up moves. The result is that option puts (nearly always) trade more than calls. Our good Doctor followed that with a graph from January 20, 2016 after the S&P 500 had declined by 9% in just two weeks. It showed the SPY options with 30 days to expiration (DTE) charting the implied volatility (IV) versus the strikes distance from the closing price (with the closing price in the center). He explained the chart and its importance. The next chart from the same day is more like what one usually sees as prices replaced implied volatility on the y-axis. The skew is still apparent. Two other charts of the same setup as the last two were displayed next. The data was from a normal day from a couple of years ago. Here one could see the skew “smile”. The skew is still obvious but is nowhere near as pronounced as in the earlier pair of charts. The Skew Index was then explained. The Skew Index measures the slope of the implied volatility curve. It is used to judge the “perceived tail risk”, which is sometimes referred to as the ”Black Swan” risk. A higher slope means the market perceives a greater risk of a large move. Dr. Data put this into historical context, where one can find the number and explained that it is not a real time number but is from the previous day. Mike's final display was a table showing a column of Skew Index readings from a high 145 down to 120 in five point increments. The other columns were the percentage chance of a 2 and 3 standard deviation move for those readings. ======== tastytrade.com ======== Finally a financial network for traders, built by traders. Hosted by Tom Sosnoff and Tony Battista, tastytrade is a real financial network with 8 hours of live programming five days a week during market hours. From pop culture to advanced investment strategies, tastytrade has a broad spectrum of content for viewers of all kinds! Tune in and learn how to trade options successfully and make the most of your investments! Watch tastytrade LIVE daily Monday-Friday 7am-3:30pmCT: http://ow.ly/EbzUU Subscribe to our YouTube channel: https://www.youtube.com/user/tastytrade1?sub_confirmation=1 Follow tastytrade: Twitter: https://twitter.com/tastytrade Facebook: https://www.facebook.com/tastytrade LinkedIn: http://www.linkedin.com/company/tastytrade Instagram: http://instagram.com/tastytrade Pinterest: http://www.pinterest.com/tastytrade/
Visibility: 1937
Duration: 13m 49s
Rating: 30