How to beat Market Makers || Volatility Smile and Put-Call Parity Explained

Today we look at the volatility smile or volatility smirk that arises for option prices in financial markets. We will also take a look at a real life example using the ASX200 index where we can potentially profit from the traditional option theory of Put-Call Parity.
00:00 Intro
00:27 Volatility Smile || Horizontal Skew
00:40 Volatility Smile || Vertical Skew
02:30 Put-Call Parity || Can you beat the Market Maker?
03:25 Put-Call Parity || ASX200 Index Order Book
04:12 Put-Call Parity || Can I profit?
05:05 Put-Call Parity || Short Call, Long Put
06:00 Put-Call Parity || Short Put, Long Call
06:50 The Market Maker Advantage
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[@lornemalvoo]

Underrated channel

[@quahmingjun7246]

Yo this is actually good information here

[@SystematicFutures]

Fantastic channel!!!

[@fernandofariajunior]

This is a great video, incredibly helpful. Thank you for taking the time to put this together!

[@whatsup7184]

Where can you get ASX Mini Future and the Future Market??? From which broker and platform????

[@rodbroker]

Hello it's Rodrigo from Brazil, one day a guy told me the safest way to trade skew is selling the call + buying the call + buying the stocks to neutralize delta, do you know this strategy? If so could you pls comment or make a video coz I found nothing on utube, thx

[@--350]

Really enjoying your videos, thanks for putting together. I have just been offered a place in a masters for financial maths, is there anywhere I can contact you to find out your experience in yours please? Thanks again!

[@QuantPy]

Email for KZbin account on channel.

[@JohnEnergy2012]

Congrats you just invented stat arb.

[@whatsup7184]

Hey, Jonathan At 3:48... I think you took the opposite meanings of Bid and Ask in your video. Bid is the buyer would like to pay vs Ask is the seller side. Should correct it ASAP. Anyway, so far this is the second video I watched and except of this issue, they are perfect.

[@QuantPy]

Thanks for your observation, but as you've said the Highest Priced Bid is the price the market maker is willing to Buy, hence for you to sell, you need to cross the spread to hit the bid. If you want to go long (buying), you have to cross the spread the other way and hit the Lowest Priced Ask of the market maker. I hope that makes sense

[@whatsup7184]

@@QuantPy That's totally right by wordy explanation down here. In the video, at that noted time it sounded not so. Hope I was wrong. BTW... Good and subtle in explanation in each video that I can pick up more supplement reference from here beside the same lectures by different instructors in MBA academic level. Very proliferate useful videos for the future. Thumbs UP to you, Bro.

[@mememan1068]

you are not calculating iv correctly, which should be apparent to you front the huge difference in iv you get when looking at a call and a put on the same strike. if you were right then there would be huge arbs by simple selling puts and buying calls and selling stock. iv should be the same per strike regardless if its a call or put (by pcp) you need to think why it could be the case that you are calculating much higher ivs for puts and lower ivs for calls. you are missing a crucial variable and the ivs are compensating for that. consider dividends.

[@mememan1068]

also your explanation for why put vols are higher is not correct. it has nothing to do with hedging costs or competition. it has to do with the fact that ivs and the bs formula assume log normality. in order to adjust for the fact that the left tail of the return distribution is fatter than this assumption while still using the language of black scholes and iv, downside puts must have higher ivs (effectively saying that the probability of going to those strikes is relatively higher than if the asset returns were log normal) The skew reflects a real statistical fact about the underlying, not some inefficiency or inability to hedge.

[@aidanlee3333]

This is the truth. An index with Euro-style options should have Call IV = Put IV for the same strike and expiration if we're assuming no-arbitrage. Even if it's not no-arbitrage, something is definitely wrong because in the examples provided, they are WAY different. Not just a few cents off, but crazy different. Something's wrong, and it's probably around dividends and borrow-rates. This is usually what happens if we naively back out volatility from some pricing model, rather than backing out an implied Forward.

[@thetruesora2111]

Pretty straightforward and simple explanations, but can you explain the 10 and the 1000 in the payoff functions? That has me a little confused

[@okopnik]

Take a close look at the variables in the formula. S and K are in dollars, while the bid and ask are in cents; that's why the ratio is 100:1.

[@user-jd5fn1uy3f]

EXPLAIN HOW THIS WORKS i DO NOT UNDERSTAND. wHY ARE YOU LOSING MONEY OR GAINING MONEY WITH THIS? Explain the buy outs sell calls and the buy calls sell puts what does this do and why when doe sit win and when does it lose ?

[@dzi333]

Isn't this actually very unusual to see such an IV "spread"?

[@louisszeto31620000]

Nope it was very common since buy sides always buy put options >> calls for hedging purpose, but as you can see in the above statement, their IV spread usually never converge. Instead, you need to engineer a better option pricing model to model that too

[@kuldeepraina7360]

Doom is coming for the world get ready worst than corona

[@4n0nym0u5]

I think it's a lost cause. Because these so called market makers SEE and KNOW all the bids/offers. They can manipulate this information to their advantage while you can only sit and hope for the best. It's glorified gambling. Nothing more.

[@andrewyork3869]

Not quite that simple in HFT sure, but once you get into the 30 second plus time frame there ability to manipulate goes out the window.

[@crazyhead1588]

That’s why you chose longer time frames if you try scalping good luck my guy try tick charts that way you don’t get huge candles hitting your stop loss

[@joep658]

@@andrewyork3869 do you mean 30 seconds and below charts?

[@andrewyork3869]

@Joe P 30 second to one minute time frames if you can't move faster then HFT move orders of magnitude slower. It's very hard, though, and ultimately an odds game.

[@joep658]

@@andrewyork3869 ah yeah thats what I assumed, would this be algorthimically trading or manual? seems a bit extreme manually trafing on such small timeframes

[@turorudi83]

Wrong.