index might go. Just because the puts have
a higher IV, and traders seem worried about
a big selloff, doesn’t mean the market will
drop. But the skew’s shape can be more or
less steep at different times. And that might
tell you if traders are more or less concerned
about the magnitude of potential price
changes. Are traders anticipating some
future news event that could drive prices
lower? If so, the skew on puts might get
steeper, with consecutively OTM puts having much higher IVs. Or are traders looking
for smooth sailing ahead? Then the skew on
the puts might get flatter, with consecutively
O TM puts having only slightly higher IVs.
In this way, IV can be used to judge overall
market sentiment. You may not know what’s
spooking the market. But if skew steepens, it
often means the market fears greater downside risk. When a stock has an upcoming
earnings announcement, the IVs of OTM
puts and calls can both be higher—making
both the call and put skew steep. That suggests the market sees the potential of a big
up-or-down move if earnings are better or
worse than expected. It’s not a perfect system, but you can let the skew tell you what
the market may be thinking.
For retail traders, skew modeling may
not be the best way to spend your time. You
may want to use skew to help select a trading
strategy for your market opinion. For example, are you bullish, and the put skew is steep?
Then a short OTM put could potentially take
advantage of that skew. Are you bullish, but
the put skew is flat? Then a long call vertical
might take advantage of the skew.
It’s never simple. And there’s much more
to strategy selection than a “skew chat.”
But this kind of analysis can give you an idea
of how to approach IV skew. Now all you
have to worry about is finding the perfect
group of trader pals to sing the birthday ditty,
and what kind of cake skew will most enjoy.
—Words by THOMAS PRESTON
Thomas Preston is not a representative of
TD Ameritrade, Inc. The material, views, and
opinions expressed in this article are solely those
of the author and may not be reflective of those
held by TD Ameritrade, Inc.
For more on the risks of trading and trading
options, see page 37, #1– 2.
Did You Hear?
There’s a New Order Type
BIG IDEA: WHO SAID 24-HOUR TRADING IS
JUST FOR DERIVATIVES TRADERS? THERE’S
A NEW TIME FRAME IN FORCE ON YOUR
THINKORSWIM® PLATFORM: 24/5 TRADING.
• Market-moving news can hit after the markets close and
might leave you stumped. What if you’re not able to make a
trade when the markets open? Good news: you may not need
to wait till the open to place your trades. From thinkorswim
desktop, thinkorswim Mobile, or Mobile Trader, you could get
a head start by trading some exchange-traded funds (ETFs)
during overnight hours using limit orders. There are a dozen
ETFs to choose from. Over time, even more ETFs will become
available for 24/5 trading (Sunday 8 p.m. ET to Friday 8 p.m. ET,
excluding market holidays). When placing an extended-hours
overnight trade, you may only place unconditional limit orders
to buy or sell. Additionally, you may only take the long side of
the trade (no short selling). There may be greater liquidity risk
for orders placed during this time period as outlined in the
Extended-Hours Trading Session Rules at https://www.
For the latest
Source: thinkorswim® by TD Ameritrade. For illustrative purposes only.
WHICH ETFS CAN YOU TRADE, AND WHA T ORDER TYPE DO YOU USE?
1 – When you load a symbol on the Trade tab, if the ETF is eligible for 24/5 trading, a purple
“EXTO Eligible” appears next to the symbol. There’s also a prebuilt 24 Hour Trading watchlist that you’ll find under Public watchlist (% - F) that displays all eligible symbols. You’ll see
a 24 icon next to the symbols.
2 – Once you’ve decided what you may want to trade, open the order menu. You’ll see two
options on the dropdown list: extended trading overnight (EXTO) and good 'til canceled