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Put/Call Rank With Reverse Skew - Aug 15, 2018 | Market Measures
We recently tested trade performance of incorporating the ratio of put prices to call prices when determining trade entry. The metric worked well for products with put side skew, which left us thinking, will this work for products with call skew?
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      Market Measures

      Put/Call Rank With Reverse Skew

      | Aug 15, 2018
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      Market Measures

      Put/Call Rank With Reverse Skew

      Aug 15, 2018

      Skew measures option demand for out of the money options. For indices, this demand exists for out of the money put options. Reverse skew exists when investors perceive more risk to the upside than the downside. Commodities like gold tend to exhibit reverse skew where the calls trade richer than the calls.

      We recently constructed a put call price ratio which compares the price of put options to call options for equal delta options as a proxy for skew. When combining this metric with implied volatility rank, we found promising trade results. In this study apply the same put to call price rank on gold, a product with reverse skew.

      The Study:

      • GLD 2011 – 2017
      • 45 DTE
      • Sold 16 Delta Strangles
      • Compared:
      • Selling strangles when IVR above 50
      • Selling strangles when put/call rank above 50
      • Selling strangles when IVR and put/call rank above 50
      • All trades held to expiration

      Results:

      Combining the put to call price rank and the implied volatility rank resulted in worse trade performance than when just trading off the implied volatility rank. Thus, for commodities with upside skew, like gold, using the put to call price rank is not an effective entry signal for improving trade performance.

      This video and its content are provided solely by tastylive, Inc. (“tastylive”) and are for informational and educational purposes only. tastylive was previously known as tastytrade, Inc. (“tastytrade”). This video and its content were created prior to the legal name change of tastylive. As a result, this video may reference tastytrade, its prior legal name.

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