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The Skinny On Options ModelingExcess Option Risk Premium | Sep 24, 2015
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    The Skinny On Options ModelingExcess Option Risk PremiumSep 24, 2015

    Premium sellers who don't understand the concepts of skew and kurtosis will gain a better understanding from watching this segment on excess option premium. Every trader can gain something from this even those who are allergic to higher math as TP makes things simpler for the viewer.

    A simple and easy to understand definition of “negative skew” is given and explained both verbally and visually. TP takes data from a segment of “From Theory to Practice on 9/17/2015 to explain this with an example.

    The Gram-Charlier enhanced Black-Scholes formula which incorporates both skew and kurtosis is provided and explained. More importantly, TP explains what it tells us and what it doesn't tell us. He then explains how we can use the skewed returns to evaluate the risk premium. The fear of a downside move and the unknown future are at the heart of trading and explain the negative skew.

    The Gram-Charlier math is a bit tough. The other math is much easier and more useful. TP walks the viewer through it and provides examples.

    Watch this segment of “The Skinny on Options Modeling” with Tom Sosnoff, Tony Battista and Tom Preston (TP) for a better understanding of excess option risk premium, skew, kurtosis, how they apply to implied volatility and what can be done with these numbers.

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