Option Volatility & Pricing Workbook: Practicing Advanced Trading Strategies and Techniques by Sheldon Natenberg

Author:Sheldon Natenberg
Language: eng
Format: epub
Publisher: McGraw-Hill Education LLC
Published: 2018-04-15T04:00:00+00:00

| CHAPTER 18 |

Skewness and Kurtosis

In order to generate theoretical values that more closely approximate option prices in the marketplace, a trader may vary volatilities across exercise prices, thereby creating a volatility skew. The skew is often expressed as a mathematical function with at least two inputs: the skewness (the slope of the volatility skew) and the kurtosis (the curvature of the volatility skew).

In the following questions you are using an option pricing model that requires a volatility, skew, and kurtosis input. All options are sensitive to changes in the volatility input. The ±25 delta options are most sensitive to changes in the skewness input, and the ±5 delta options are most sensitive to changes in the kurtosis input. The at-the-money (±50 delta) options are not affected by changes in skewness or kurtosis.

1. For each group of options below, will the given change cause the option to rise in value (+), fall in value (–), or remain unchanged (0)? If more than one option will change in the same direction, which option will change most (++ or – –)? Assume that all options expire at the same time.

a. The volatility is increased:

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