Weird volatility skew

[derenik]

I'm looking at the volatility skew of BHP options in the front month (29 Jul). Most of the time the volatility of ATM call/put matches. The skew is smooth and looks like a nice (almost) symmetric curve.
But sometimes two things happen which I don't understand.

1. The volatility of ATM calls becomes much greater than the volatility of ATM puts. The gap is about 10-20%. It lasts for 10-20 minutes then comes back.

2. The volatility of ITM puts drops to zero from time to time. Sometimes puts bid has zero volatility but the ask is ok. The other times both bid and ask have zero volatility and the puts are traded with no extrinsic values.

What is the reason for this?

[cutz]

Hi derenik,

Are they market maker prices or retail trader prices, generally a retail trader may put in a low buy price if no quotes are showing then work it up ( unless a quote is requested ).

Deep in the money options generally have no time value build into the price.

BTW which puts traded with zero vol ? Maybe they where part of a combo.

[derenik]

Quote: Originally Posted by cutz Hi derenik, Are they market maker prices or retail trader prices, generally a retail trader may put in a low buy price if no quotes are showing then work it up ( unless a quote is requested ). Deep in the money options generally have no time value build into the price. BTW which puts traded with zero vol ? Maybe they where part of a combo.

[cutz]

Quote: Originally Posted by derenik I don't know if it is a retail trader. There were a few consequent strikes quoted with zero volatility so looks like a MM. Those ITM puts were not so deep. With BHP trading at 38 the strikes with zero vol were 39.5 to 42.

[derenik]

Quote: Originally Posted by cutz Can't say I can see the same thing, are they yesterdays trades or some other time ?

[derenik]

Got it. Those ITM puts have so small extrinsic value that tiny movements in underlying by 1-2 cents throw the volatility rock bottom or sky high depending on direction of the movement. And while the price amend orders for options from MM are still on their way to exchange we see this "glitch". Or they probably even dont care to amend the prices.

[nioka]

There are more than one type of operator in this section of the market. It is no longer rational. There are too many gamblers for a start. There are too many treating it as a game of chess. There are too many operators that are in a position to manipulate the market. There are those with the facilities to make and reverse calls in the time it takes others to place an order.

No wonder it seems weird at times. That is because it IS weird.

[cutz]

Quote: Originally Posted by derenik Got it. Those ITM puts have so small extrinsic value that tiny movements in underlying by 1-2 cents throw the volatility rock bottom or sky high depending on direction of the movement. And while the price amend orders for options from MM are still on their way to exchange we see this "glitch". Or they probably even dont care to amend the prices.

[wayneL]

Quote: Originally Posted by cutz There's nothing weird about exchange traded options, none of the above occurs in oz on ETOs, have a look at the order book if you are not convinced, if anything there aren't enough operators in oz. I'm not sure what you're trying to describe but options are a beautiful thing.

[derenik]

Quote: Originally Posted by cutz Sorry but that doesn't make sense.

[nioka]

Quote: Originally Posted by cutz I'm not sure what you're trying to describe but options are a beautiful thing.

[cutz]

Quote: Originally Posted by derenik Feel free to ask questions if you don't understand it.

[cutz]

Quote: Originally Posted by nioka Beauty is in the eye of the beholder.

[derenik]

Quote: Originally Posted by cutz How are you measuring vol, are you using last traded price/settlement price if no trades have occured on the day ?

[nioka]

Quote: Originally Posted by cutz Agree with you there. But why options trading Why the sour thoughts on these beauties ?

[wayneL]

Quote: Originally Posted by nioka .....and third but not least, the use of options trading and short selling causing the crash many companies.

[cutz]

Quote: Originally Posted by nioka Caused by three things.

[nioka]

Quote: Originally Posted by cutz Disagree, Caused by one thing, rampant property spectulation and overgearing, same thing that's happening in oz.

[wayneL]

Nioka

Can you explain precisely how options caused the GFC?

(this should be good)

[mazzatelli]

Quote: Originally Posted by cutz ETO’s are probably one the least risky instruments on the exchange (provided they are well managed) , much less risky than equities.