Primer on Options and Volatility Strategies - CBOE

Skew trading is equivalent
to trading 2nd order gamma

Mathematically, skew trading is

• Vanna (size of skew position) = dDelta/dVol

As Vol α Spot (negative spot vol correlation
hence vanna can be considered to be seco

Delta hedging long skew is iden

When spot falls, the higher implied lifts the
needs to be bought.
When spot falls the lower implied causes de
short call has higher delta) which means mo
and selling on rises is identical to gamma s

Premium Delta hedging due to trading skew

10

5

0 25 50 75 100
0 Spot

-5 Market falls Market rises

-10 Buy underlying Sell underlying

CBOE Premium Premium if market falls Premium if market rises

similar to gamma trading

l (and = dVega/dSpot)
n) => Vanna α dDelta/dSpot = Gamma
ond order gamma

ntical to delta hedging gamma

delta of long put which means more underlying

elta to increase (call has lower delta, hence
ore underlying needs to be sold. Buying on falls
scalping.

Premium Delta hedging due to trading gamma
60
50 Market rises
40 Sell underlying

30

20

10 Market falls
Buy underlying

0

0 25 50 75 100
Spot

Straddle Straddle + long stock Straddle + short stock

51

Any Questions?

VOLATILITY RISK PREMIA

Fair price implied volatility
Call overwriting

HEDGING / LONG VOLATILITY STR

CBOE VIX Tail Hedge Index
Put / put spread protection
Best choice of strike for option trades

VIX AND VOLATILITY TRADING

What does implied volatility look like
Advanced volatility measures
Square root of time rule
Skew trading

CBOE

RATEGIES

52

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Characteristics and Risks of Standardized Options. Copies are availa
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or to provide investment advice. In order to simplify the computa
included in the examples used in this presentation. These costs will
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OTM BuyWrite Index (BXYSM), CBOE S&P 500 PutWrite Index (PUTSM
(CLLSM) (the “Indexes”) are designed to represent proposed hypothet
do not take into account significant factors such as transaction costs
be significantly higher than transaction costs for a passive strategy
Indexes should discuss with their brokers possible timing and liquidi
materials contain comparisons, assertions, and conclusions regarding
how the indexes might have performed in the past if they had exist
provided in this document solely for informational purposes. Annua
can be duplicated and there is no certainty of doing so. Supporting do
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to buying or selling an option, a person must receive a copy of
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M), CBOE VIX Tail Hedge Index and CBOE S&P 500 95-110 Collar Index
tical buy-write strategies. Like many passive benchmarks, the Indexes
s and taxes. Transaction costs and taxes for a buy-write strategy could
y of buying-and-holding stocks. Investors attempting to replicate the
ity issues. Past performance does not guarantee future results. These
g the performance of indexes based on backtesting, i.e., calculations of
ted. Backtested performance information is purely hypothetical and is
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