Table of Contents
Computing the Put/Call Skew
Example Computation for MasterCard
![](https://i1.wp.com/fdscanner.com/wp-content/uploads/2020/07/mastercard-put-skew.png?fit=1024%2C42&ssl=1)
In this example, data is pulled from MasterCard (MA) after close on May 14 2020. On that day, in our Put Skew Index, MA had a put skew of 1.911, let’s see how this number is computed from raw data.
Step 1: Computing prices, getting the right strikes
Legend | Description | Computation | Output |
---|---|---|---|
Price | Current Share Price | $269.16 | |
110% SP | 110% of Current Share Price | $269.16 * 1.1 | $296.08 |
90% SP | 90% of Current Share Price | $92 * 0.9 | $242.24 |
High Call Strike | Call option immediately above 110% SP | Strike above $296.08 | $300 Call |
Low Call Strike | Call option immediately below 110% SP | Strike below $296.08 | $295 Call |
High Put Strike | Put option immediately above 90% SP | Strike above $242.24 | $245 Put |
Low Put Strike | Put option immediately below 90% SP | Strike below $242.24 | $240 Put |
Step 2: Ensuring options pass liquidity checks
Option | Expiry | Bid | Ask | Ask/Bid |
---|---|---|---|---|
$295 Call | 6/19 | $2.64 | $2.93 | 2.93/2.64 ~= 1.11 |
$300 Call | 6/19 | $1.65 | $1.97 | 1.97/1.65 ~= 1.19 |
$240 Put | 6/19 | $4.30 | $4.60 | 4.6/4.30 ~= 1.07 |
$245 Put | 6/19 | $5.20 | $5.75 | 5.75/5.20 ~= 1.10 |
The liquidity check requires Ask/Bid of all 4 options to be below 1.25. If any are above 1.25, they are excluded from Put/Call Skew index. Stocks that barely make the liquidity cut off may enter and exit the Put/Call Skew index multiple times per day.
Step 3: Computing option midpoints
Option | Computation | Midpoint price |
---|---|---|
$295 Call | (2.64 + 2.93)/2 | $2.785 |
$300 Call | (1.65 + 1.97)/2 | $1.81 |
$240 Put | (4.3 + 4.6)/2 | $4.45 |
$245 Put | (5.2 + 5.75)/2 | $5.475 |
The midpoint price is taken as the price for that option.
Step 4: Interpolated Price
Option | Computation | Interpolated price |
---|---|---|
$296.08 Call | 2.785 – (2.785-1.81)/(300-295) * (296.08 – 295) | $2.5744 |
$242.24 Put | 4.45 + (5.475-4.45)/(245-240) * (242.24 – 240) | $4.898 |
Step 5: Calculate Skew
Category | Requirement | Skew |
---|---|---|
Call Skew | 10% OTM Call Price > 10% OTM Put Price | N/A |
Put Skew | 10% OTM Put Price > 10% OTM Call Price | $4.898/2.5744 = 1.903 |
If the Put price is higher, the stock has a put skew. If Call price is higher, the stock has a call skew.
In this example of MA on May 14 2020, we manually computed Put skew with a result of 1.903 using the end of day data.
There’s a slight disparity to FDscanner’s computed 1.911 because the exact time we used to retrieve option bid/ask is slightly different.
Conclusion
Result for MasterCard May 14 2020:
Manually Computed Put Skew: 1.903
FDscanner’s Put Skew: 1.911
Close Enough