# Weird volatility skew



## derenik (21 July 2010)

I'm looking at the volatility skew of BHP options in the front month (29 Jul). Most of the time the volatility of ATM call/put matches. The skew is smooth and looks like a nice (almost) symmetric curve.
But sometimes two things happen which I don't understand.

1. The volatility of ATM calls becomes much greater than the volatility of ATM puts. The gap is about 10-20%. It lasts for 10-20 minutes then comes back.

2. The volatility of ITM puts drops to zero from time to time. Sometimes puts bid has zero volatility but the ask is ok. The other times both bid and ask have zero volatility and the puts are traded with no extrinsic values.

What is the reason for this?


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## cutz (21 July 2010)

Hi derenik,

Are they market maker prices or retail trader prices, generally a retail trader may put in a low buy price if no quotes are showing then work it up ( unless a quote is requested ).

Deep in the money options generally have no time value build into the price.

BTW which puts traded with zero vol ?  Maybe they where part of a combo.


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## derenik (21 July 2010)

cutz said:


> Hi derenik,
> 
> Are they market maker prices or retail trader prices, generally a retail trader may put in a low buy price if no quotes are showing then work it up ( unless a quote is requested ).
> 
> ...




I don't know if it is a retail trader. There were a few consequent strikes quoted with zero volatility so looks like a MM.
Those ITM puts were not so deep. With BHP trading at 38 the strikes with zero vol were 39.5 to 42.


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## cutz (21 July 2010)

derenik said:


> I don't know if it is a retail trader. There were a few consequent strikes quoted with zero volatility so looks like a MM.
> Those ITM puts were not so deep. With BHP trading at 38 the strikes with zero vol were 39.5 to 42.




Can't say I can see the same thing, are they yesterdays trades or some other time ?


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## derenik (21 July 2010)

cutz said:


> Can't say I can see the same thing, are they yesterdays trades or some other time ?




They were on Friday, 16 Jul. But I noticed it earlier last week so it was not just a glitch. Just keep an eye on the skew and you'll notice.

Do you know why calls volatility can suddenly go up and the puts down to large extent? It also happened a few times per day on Friday. The most difference was around ATM.


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## derenik (23 July 2010)

Got it. Those ITM puts have so small extrinsic value that tiny movements in underlying by 1-2 cents throw the volatility rock bottom or sky high depending on direction of the movement. And while the price amend orders for options from MM are still on their way to exchange we see this "glitch". Or they probably even dont care to amend the prices.


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## nioka (23 July 2010)

There are more than one type of operator in this section of the market. It is no longer rational. There are too many gamblers for a start. There are too many treating it as a game of chess. There are too many operators that are in a position to manipulate the market. There are those with the facilities to make and reverse calls in the time it takes others to place an order.

No wonder it seems weird at times. That is because it IS weird.


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## cutz (23 July 2010)

derenik said:


> Got it. Those ITM puts have so small extrinsic value that tiny movements in underlying by 1-2 cents throw the volatility rock bottom or sky high depending on direction of the movement. And while the price amend orders for options from MM are still on their way to exchange we see this "glitch". Or they probably even dont care to amend the prices.




Sorry but that doesn't make sense.





nioka said:


> There are more than one type of operator in this section of the market. It is no longer rational. There are too many gamblers for a start. There are too many treating it as a game of chess. There are too many operators that are in a position to manipulate the market. There are those with the facilities to make and reverse calls in the time it takes others to place an order.
> 
> No wonder it seems weird at times. That is because it IS weird.




There's nothing weird about exchange traded options, none of the above occurs with ETOs, have a look at the order book if you are not convinced, if anything there aren't enough operators in oz.

I'm not sure what you're trying to describe but options are a beautiful thing.


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## wayneL (23 July 2010)

cutz said:


> There's nothing weird about exchange traded options, none of the above occurs in oz on ETOs, have a look at the order book if you are not convinced, if anything there aren't enough operators in oz.
> 
> I'm not sure what you're trying to describe but options are a beautiful thing.




Yep, the arb boys keep it honest.


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## derenik (23 July 2010)

cutz said:


> Sorry but that doesn't make sense.




Feel free to ask questions if you don't understand it.
Just stating that something doesn't make sense doesn't make sense either


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## nioka (23 July 2010)

cutz said:


> I'm not sure what you're trying to describe but options are a beautiful thing.




Beauty is in the eye of the beholder. The ugliest of babies looks beautiful to its mother. I just happen to see the stock exchange in general and options trading in particular, as a weird ugly monster manipulated by some to the disadvantage of many. We do not live in an ideal world.


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## cutz (23 July 2010)

derenik said:


> Feel free to ask questions if you don't understand it.




How are you measuring vol, are you using last traded price/settlement price if no trades have occured on the day ?


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## cutz (23 July 2010)

nioka said:


> Beauty is in the eye of the beholder.




Agree with you there.

But why options trading?

ETO’s are probably one the least risky instruments on the exchange (provided they are well managed) , much less risky than equities.

Why the sour thoughts on these beauties ?


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## derenik (23 July 2010)

cutz said:


> How are you measuring vol, are you using last traded price/settlement price if no trades have occured on the day ?




No I'm looking at intraday changes in IV and I'm using mid-prices of underlying and both bid and ask of option contracts. So I'm looking at the IV of bid and IV of ask. No trades on the day is totally illiquid for me, I don't look at such contracts.


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## nioka (23 July 2010)

cutz said:


> Agree with you there.
> 
> But why options trading
> 
> Why the sour thoughts on these beauties ?




They should be beauties but they bred a monster. My thoughts on the GFC. Caused by three things. The first is unbridled greed coupled with the second,  misuse of the banking system and third but not least, the use of options trading and short selling causing the crash many companies.


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## wayneL (23 July 2010)

nioka said:


> .....and third but not least, the use of options trading and short selling causing the crash many companies.



Rubbish. That's the muppets media and fund industry placing blame somewhere other than where is should be placed.

We've been through this before.


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## cutz (23 July 2010)

nioka said:


> Caused by three things.




Disagree,

Caused by one thing, rampant property spectulation and overgearing, same thing that's happening in oz.


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## nioka (23 July 2010)

cutz said:


> Disagree,
> 
> Caused by one thing, rampant property spectulation and overgearing, same thing that's happening in oz.




I'm happy to add that as a forth but coming forth behind the other three.


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## wayneL (23 July 2010)

Nioka

Can you explain precisely how options caused the GFC?

(this should be good) :


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## mazzatelli (23 July 2010)

cutz said:


> ETO’s are probably one the least risky instruments on the exchange (provided they are well managed) , much less risky than equities.




Actually, I'd disagree - its more risky, because people don't understand how derivatives work and the underlying principles that requires participants to operate the way they do.


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## wayneL (23 July 2010)

mazzatelli said:


> Actually, I'd disagree - its more risky, because people don't understand how derivatives work and the underlying principles that requires participants to operate the way they do.




It's an interesting point made by Stuie Johnson. There are the specific risks inherent in the instruments themselves, which of course can be manipulated an limited by the trained, but there is knowledge and/or information risk... playing with something you know SFA about.


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## nioka (23 July 2010)

wayneL said:


> Nioka
> 
> Can you explain precisely how options caused the GFC?
> 
> (this should be good) :




We have been through this before. If you dont see my point of view by now then there is no point in me going through it all again.


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## wayneL (23 July 2010)

nioka said:


> We have been through this before. If you dont see my point of view by now then there is no point in me going through it all again.




Then I can only conclude that you can't explain how.


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## nunthewiser (23 July 2010)

I,m personally waiting to hear the reasoning also . just as i waited when twiggy blamed the shorters but couldnt explain the continued fall in price once shorting was banned....

Lots of broad statements but with no explainable knowledge attached.

Can i blame that on the shorters and derivative users also?


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## nioka (23 July 2010)

nunthewiser said:


> I,m personally waiting to hear the reasoning also . just as i waited when twiggy blamed the shorters but couldnt explain the continued fall in price once shorting was banned....
> 
> Lots of broad statements but with no explainable knowledge attached.
> 
> Can i blame that on the shorters and derivative users also?




It is all there in discussions on threads about 18months ago. I dont stutter and I get sick of trying to talk to those that dont listen, cant see the wood for the trees and dont think outside the square. I just call a spade a spade as is often quoted here, anyone is free to have their own thoughts and you now know mine. No fees for service, its free advice. Back to actual stock research... see ya later.


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## wayneL (23 July 2010)

Why not just admit that your hypothesis is wrong instead of accusing others of some deficiency because they require evidence of your assertion?

... or you could present some logic... or just link to previous posts if you prefer?


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## skyQuake (23 July 2010)

Recommend "The Quants" for a different point of view into it.

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And back on topic, OP, how are you calculating the vols? Midpoint of bid/ask, and at what time? MM's fool around and dont really come on till 11 so it might just be retail trades.


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## mazzatelli (23 July 2010)

nioka said:


> It is all there in discussions on threads about 18months ago.




What, that derivative traders can't short the spot to delta hedge positions? - Thats what you stated, which is grossly misinformed....

@skyQuake
I'm tired of hearing about that d@mn book....
haha


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## nunthewiser (24 July 2010)

nioka said:


> It is all there in discussions on threads about 18months ago. I dont stutter and I get sick of trying to talk to those that dont listen, cant see the wood for the trees and dont think outside the square. I just call a spade a spade as is often quoted here, anyone is free to have their own thoughts and you now know mine. No fees for service, its free advice. Back to actual stock research... see ya later.




lol interesting.

thanks for the reasoning behind your deep analasis into the GFC meltdown triggers.


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