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Total Posts: 55
Joined: Jun 2007
Posted: 2017-05-03 14:07
Hello all,

I have a simple vol model (vs strike) that simply contains the Atm Vol and Skew

Vol(K) = AtmVol + Skew * (K - F)

If I look at the sensitivity of the option prices due to a change in skew (skewPrime), I get a wave-like function (positive for the calls and negative for the puts). Due to the shape of Vega (and the linearity of the skew formula above), the max and min of the call side and put side respectively of the SkewPrime occurs somewhere around the 10-15 delta options.

I'm wondering if there's an arbitrage-free formula that sets the peaks at 30 delta or 25 delta perhaps. I want the model to have a "near" skew (25-30 delta), rather than a far skew (10-15 delta).

Sometimes it's hard to fit certain call spreads given the formula above. I do have wing components, but I removed them for simplicity purposes (they peak at around 10-5 delta). So this far skew somewhat overlaps with the wings.

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