1. Tyler Michalove Blackpier Capital
Trading Skew
Go Slow
Preface the talk
Lots of info
Refer back to and use as a resource
Researched for last 5 years
Transition: answer some questions
Tyler Michalove
Blackpier Capital

2. Disclaimer
There is a very high degree of risk involved in trading. Past results are not indicative of future returns. Tyler Michalove(Blackpier Capital) and all individuals affiliated assume no responsibilities for your trading and investment results. The indicators, strategies, columns, articles and all other features are for educational purposes only and should not be construed as investment advice. Information for stock observations are obtained from sources believed to be reliable, but we do not warrant its completeness or accuracy, or warrant any results from the use of the information. Your use of the stock observations is entirely at your own risk and it is your sole responsibility to evaluate the accuracy, completeness and usefulness of the information. You must assess the risk of any trade with your broker and make your own independent decisions regarding any securities mentioned herein. Affiliates of Blackpier Captial may have a position or effect transactions in the securities described herein (or options thereon) and/or otherwise employ trading strategies that may be consistent or inconsistent with the provided strategies. Blackpier Captial is not a financial advisor or Broker Dealer. Blackpier Capital does not recommend any trades presented and the use of trades are hypothetical. This presentation if for educational purposes only.

3. The 4 Questions
Why should all traders care about skew and volatility? 1
How to identify and measure different skew environments 2
How does skew affect butterfly trading returns? 3
How can we design a trade to take advantage of different skew environments? 4
3. Also note that we will be focusing on RUT index options skew for this talk
Transition: Let’s jump into our first example on what is volatility

4. Volatility And Options Pricing
Volatility = Demand Demand + Probability = Price
Visual leaner
3000 vs 4500
Same probability, what’s affecting the price?
how can we define volatility?
Combine demand and probability to get price
What is skew? … just the demand for an entire options expiration
Transition: Skew and Probability are 2 central themes so let’s go a little deeper to further our understanding.

5. Skew and Probability Volatility Market Price
Draw skew curve and explain the parts
Overlay probability distribution
Transition: Let’s take a look at this demand in action by looking at 1987
Market Price

6. 1987 1987 changed the structure of the options market
Define OTM characteristics
Other indices and stocks
Transition: recap skew definition

7. How skew moves Steepening Skew October 2014 November 2014
Intro: first live curve, using O.N.E for this data
Relationship with ATM volatility and the market movements
How a curve gets steep – front, back, or both moving
What are investors doing to cause this to happen?
Transition: What about the other way, how can skew flatten?

8. How Skew Moves Flattening skew July 2015 September 2015
Investors behavior to cause the skew to flatten
Answer to question 1: Why should all traders care about skew? A technical indicator at its core is trying to track the flow of money….
Transition: Recap skews relationship to volatility and market movements…does it always hold?

9. Volatility up, skew flatter? Volatility down, skew steeper?
Correlation
Volatility up, skew flatter?
Volatility down, skew steeper?
Some popular publicly available butterfly strategies typically like high vol
Is high vol inherently always good?
-single options trader vs. spread trader
Transition: How to we measure skew to determine what environment we are in?

10. Measurements All relative
Different ways to measure and look at the curve
What’s important to your style of trading?
1 – need to compare
2- different vol measures, different points on the curve can be doing different things
Transitioin: What’s important to your style of trading, what’s your slice of the market?

11. 10 20 40 Delta is probability that an option will expire ITM
Your slice of the options market
Delta is probability that an option will expire ITM
Expansion and contraction of probabilities
Explain the measurement
Why these points?
Why use delta measurement and not actual implied vol?
-price!
-isolated probability
Measuring distance is a combination of both skew and probability…leads us to the pricing and subsequently our profitability
Transition: Let’s plot these points out on a skew curve

12. 10 20 40 Draw on the delta points on this curve 10 delta = 820
ATM = 915
Explain the role of probabilities…skew curve is just isolated vol
- draw arrows showing what happens to these points when skew flattens and steepens
Transition: Now that we have defined our slice of the options market, let’s look at the results of the measure over the last 4 years

13. Historical Skew March 2013 December 2015 September 2016
Note time period and what each line is
Point out how they typically move together
Transition: break down the measure of skew more, which point on the curve is actually moving?

14. Historical Skew March 2013 December 2015 September 2016
Note how this reflects investors behavior
Transition: look at these movements on the actual curve, isolate volatility again

15. March 2013 February’s change to march
Draw on a butterfly and show how a steep skew affects the fly
Transition: How do we determine if we are steep or flat?
March 2013

16. Steep or Flat? Find the average skew value over a data set
19% from 2013 to 2017
Is the current measure above or below the average?
Explain the chart
Talk about unchanged skew, risk models are correct… can’t account for a changing skew
Talk about how changes in skew affect fly prices
What we really care about Is if skew is getting steeper or flatter
Transition: put some returns behind these ideas

17. Average Returns Strategy A B C Above 19 and Flat 2.23% 2.54% 2.04%
Below 19 and Steep
3.08%
0.48%
1.17%
3 popular, publicly available strategy and back tested results, 2013 to 2017
Explain each row and column
Examine the results
Note how each strategy is getting that result and why
Transition: optimizing adjustments

18. Show fly strikes and adjustment on curve, draw on projected curve…overlay actual butterfly position
Steep skew plus dropping vol, move shorts
Just a steep skew, move your longs
-trump rally, vol slightly up, steeping skew
Transition: How do we predict what skew is going to do?
March 2013

19. How do we know at decision time?
Compare the current expiration to the next
Beginning of the trade below 19
Draw on strikes,
Show adjustments
Transition: Ask how everyone is doing, good? Good. One last section…recap what we learned up to this point

20. Skew Efficient Trade
Take what we’ve learned and apply that knowledge to this skew curve…Start with the bottom long
Note starting date: December 23, 2017
1250 March put
1370 March put
1370 March Call
1480 March Call
Transition: What does this look like on a risk graph?

21. Risk Graph Note gamma trend, risks, and theta
This is only a trade, not a strategy
Example isolates skew by controlling for vol and delta movements
Transition: click forward a few days

22. 10 days in
Note theta, 20k
Transition: click forward again

23. The Power of Skew 5 days later Flat to up 76k or 16%
Note theta added only 10k to the position
Transition: end of the trade

24. The Power of Skew
End of the trade, no change in ATM volatility, market practically unmoved, just the steepening of the skew curve
25 day trade, made 23% at 84 DTE
Theta projected 50k gain, made 111,850
Transition: recap on what all we’ve learned, open it up for questions
-why should all traders care about skew?
-how to measure skew
-Skews affect on butterfly returns
-how to trade skew

25. Questions? tmichalove@blackpiercapital.com
End: Thank everyone for their time, give credit where it’s due