Skew Trading

Basic skew can be measured with any option chain by comparing IV across strikes. For percentile analysis, you'd need historical data - some brokers provide this, or you can track it yourself. Professional traders use specialized tools, but simple measurement is accessible.

It depends on the structure. A risk reversal has directional exposure (bullish). A put credit spread has slight bullish bias. A butterfly can be delta-neutral. You can choose structures with or without directional exposure based on your view.

Some skew structures are TFSA-eligible (put credit spreads, butterflies) while others are not (naked puts, risk reversals). You need to use defined-risk structures. If your broker allows spreads in TFSA, many skew trades work.

It varies widely - from days to weeks. After a sharp selloff, skew might normalize within 1-2 weeks as fear subsides. If there's ongoing uncertainty, it can stay elevated longer. Use time-based exits if skew doesn't normalize as expected.

Puts are expensive for a reason - they pay off in crashes. Selling puts works until it doesn't - a crash can cause massive losses. Skew trading is about identifying when puts are UNUSUALLY expensive vs normal, not just expensive. And sizing is critical.

Compare to history using percentiles. If current skew is in the 90th percentile (steeper than 90% of the past year), it's likely 'too steep' and may normalize. Context matters too - during genuine crises, steep skew may be warranted.

It depends on your goal. If you want pure skew exposure, hedge delta with stock. If you're comfortable with bullish bias, leave it unhedged. Hedging reduces directional risk but adds complexity and costs.

Volatility trading bets on the LEVEL of IV (long or short vega). Skew trading bets on the SHAPE of IV across strikes (relative pricing). You can be neutral on overall IV but have a view on skew. A vega-neutral skew trade is unaffected by parallel IV shifts.

You need liquid options with multiple strikes. XIU is good for broad market skew. Banks (RY, TD, BMO) have liquid options. Energy (SU, ENB) can have interesting skew patterns. Avoid illiquid options where bid-ask spread erodes edge.

Yes, but it's rare for equities. It can happen during takeover speculation (OTM calls get bid up) or for commodities (upside spikes). If you see call skew on an equity, investigate why - it's unusual and may offer opportunity.

Calculate the vega of each leg. Choose sizes such that net vega = 0. For example, if the short put has vega of +0.20 and long call has vega of +0.15, you'd size them so 0.20x - 0.15y = 0 while maintaining skew exposure. This isolates skew from parallel IV moves.

During high correlation regimes, index components move together, which affects index skew vs single-stock skew. High correlation typically supports steeper index skew. Trading the skew difference between index and components requires correlation analysis.

SABR is common for FX/rates but used for equities too. SVI (Stochastic Volatility Inspired) parameterizes the smile. Local volatility models price skew implicitly. Traders compare model-predicted skew to market skew for relative value.

Model scenarios: (1) Skew doubles (steepens significantly), (2) Skew inverts, (3) Large market move with skew spike, (4) Correlation spike. Calculate portfolio P&L under each. Ensure you can survive realistic stress scenarios.

Yes - skew varies by expiration. Near-term skew is often steeper than far-term. You can trade calendar skew spreads: sell near-term rich put skew, buy far-term cheaper put skew. Requires analysis of skew across the term structure.