Volatility Skews

Last modified 11:16, 5 Nov 2012

Overview

Skew Charts provide a graphical representation of the implied volatility of a series of options having the same exercise date over the entire range of strikes.

The Skew chart plots all the actual amounts of implied volatility and then plots a “best fit” line.

Many methods of calculating volatility, such as implied average and historical, produce theoretical IV values. However, in the real market, each option series trades at a different volatility.

Because the skew line is based on actual prices, it provides a true indication of actual supply and demand for each option relative to other options in the series. Visually referencing the position of each trade relative to the “best fit” line allows traders to identify under or overpriced options based on the current, actual implied volatility.

Create a Skew Chart

To create a skew chart, click on the Options icon and select Volatility Skews from the drop-down menu:

tolbutn_optionsvolskew.png

This will open a blank Volatility Skews work-page.

Enter the symbol of the security whose options you wish to view the skew for, and press Enter.

ogvolskew_chrtpage.gif

The page consists of three areas: Skew Chart function bar, Expiry Date Selection area and the Skew Chart work area.

Skew Chart Function Bar

Each Skew Chart is controlled by the following function bar:

ogvolskew_functionbar.gif

Refresh

butn_go-off.gif

Refresh the graph's data with the latest market information.

The Remote Action Monitor will indicate the data request's progress.

Symbol Selection

Enter the underlying security that you wish to retrieve its options data to create the skew chart for.

butn_symbselector.gif

Once a suitable code has been entered, the description of the security will appear beside the select field.

Model

butn_optn_model.gif

A number of different mathematical models are employed to calculate volatility in each options market.

For more information on using this function, go to the Option Models section of the Shared Utilities section of this Help.

Put / Call Display

butn_optn_conpoff.gif

or

butn_optn_poncoff.gif

You can switch between showing only puts or calls or showing both in a split screen (see next).

When the table of only one type of option is displayed, the hidden type's button outline will be removed.

When both types are displayed, both buttons will have an outline.

News

butn_news.gif

Single left-mouse click on the Headline to view it in the News Article window of the News work page. The work page also includes a list of other Breaking News and a Search News facility containing search and news filter tools.

For more information, go to the Headline News help topic.

Strike Expiry Selection Area

The table will list all of the available options for the underlying security, grouped according to their expiry dates.

By default all will be displayed on the skew chart at right.

Expiry Months

To make the chart less cluttered, the user can select exactly which option's skew chart to view at a time.

Check and un-check the boxes to toggle the view of the options on the chart.

Days to Expiry

Alternatively, display only options within a specified range of days to expiry, or in the case of the last button, more than 90 days from expiry.

The default is All.

Skew Chart Work Area

The Skew Chart work area only contains information about the options that are displayed in the chart, and its underlying security.

Underlying security's details

Price Data details of the underlying security appears in the row at the top of the skew chart work area. This data can be updated using the DoDbutn_go-off.gifrefresh button.

Put / Call Display

Use the Put / Call Display buttons in the function bar to control whether only Puts or Calls, or both Puts and Calls are displayed:

 

 

Calls only displayed butn_optn_conpoff.gif
ogvolskewcalls2.gif ogvolskewcalls3.gif
Puts only displayed butn_optn_poncoff.gif
ogvolskewputs2.gif ogvolskewputs3.gif

 

Displayed Option Legend

In the top left corner, all options currently displayed in the graph are listed in the color that they are plotted in. Puts are represented by small square icons, calls by small triangular icons.

The legend will reflect the selection of only puts or only calls using the Put / Call Display buttons in the function bar.

Zoom function

The Zoom function in the Skew Chart page is slightly different from the zoom tool in other charts:

 

Zoom-in Zoom-out
ogvolskewdrag1.gif ogvolskewdrag2.gif

Click in the chart and drag downward to the right, surround the area you want to zoom in on with the black lines.

Release the mouse and the chart will zoom in on the area you have selected.

To return to the original scale, click on the chart and drag upward to the left. Create a rectangle of approximately the same size and previously and release the mouse.

The chart will resize to its original scale.

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