How to Trade the Volatility Smile in
Praveen Dubey (SEBI Registered RA)
SP RESEARCHVIA PVT. LTD. (INH000015808)
Navigating Volatility Skews and Smiles
Real-world options markets do not have constant implied volatility across strike prices. Out-of-the-money options often trade at a premium due to tail risk hedging. The quantitative desk at SP RESEARCHVIA PVT. LTD. outlines the arbitrage mechanics.
What is the best option strategy to trade volatility skews?
Traders construct Ratio Spreads or Butterfly Spreads, selling the high-IV out-of-the-money options and buying the lower-IV near-the-money options to profit from volatility normalization.
Risk Management in Skew Arbitrage
Ensure positions are delta-neutral to protect against sudden market moves, and monitor bid-ask spreads in out-of-the-money contracts to manage execution costs.
Written by Praveen Dubey
Chief Research Analyst | SEBI Reg: INH000015808
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