This episode explores the concept of skewness in option pricing, specifically within the context of managed SPY strangles. Against the backdrop of a discussion about a recent study involving 19 years of data, the hosts delve into how skewness, a measure of asymmetry in a probability distribution, impacts profit and loss (P&L) distributions. More significantly, the analysis reveals that the magnitude of negative skew decreases with increasing VIX (market volatility), implying less downside risk during periods of high volatility. For instance, the study showed that while higher Delta options increase average P&L, they also decrease skew, highlighting a trade-off between risk and reward. The hosts further discuss how this understanding of skew dynamics, particularly in relation to VIX and Delta, informs their trading strategies, emphasizing the importance of IV rank (Implied Volatility Rank) and the opportunities presented during periods of high volatility. In conclusion, this episode provides a quantitative and practical application of statistical concepts to option trading, offering valuable insights for traders seeking to manage risk and maximize returns.
