Check out the previous post in this blog for a blow by blow account of building strategy around skewness (part 1).
Up until now the strategy knowed back and forth between buying and selling 100% as the skew became more or less favourable.
Now, we add a little nuance.
The implied skew index is a scale usually between 100 to 150.
The all time low is 101 and high is 146.
We specify a continuous scale between 100 and 150.
100 when the strategy is 100% long the S&P 500; the strategy shorts 100% at 150. When the implied skew is 125 we are neither long or short - but stick everything into cash.
The upshot? Our Sharpe has increased again to about 0.37.
Now just a 4% chance of trading jibberish.
More analysis to follow.