In his epic poem The Divine Comedy, Dante Alighieri combined the regional dialects of his time to create the modern Italian language, a unifying tongue that could be understood throughout the land.
Fellow Florentine Lorenzo Ravagli, head of European FX volatility strategy at JP Morgan, jokes that his latest paper tries to do for volatility trading what Dante did for the Italian language, by proposing a unified framework for harvesting the skew premium in options.
Ravagli presents a range of strategies for trading the skew premium, which is driven by the asymmetric pricing of out-of-the-money calls and corresponding puts. The simplest possible way of taking a view on the skew premium is through delta-hedged risk reversals, he explains. But the complexity of this strategy can increase significantly…
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