Hi, can anyone explain why an individually capped basket call option can be seen as a covered call option in terms of volatility skew exposure?Thx

Any inputs?

A better formulated question might help: define your payoffs and link to whoever/whatever said what you don't understand.

QuoteOriginally posted by: AlanA better formulated question might help: define your payoffs and link to whoever/whatever said what you don't understand.Sorry for about this, let me elaborate the question in more detail.Suppose we now have a globally floored(at 0) locally capped(at 5%) cliquet with max[0, ∑min(Ret(i), 5%)] and we'd like to analyze whether the buyer is short or long skew. The way I decompose it would be max[0, -∑max(-Ret(i)+5%, 0)+n*5%], so the buyer is long the global floor 0 which is equivalent to long a strip of OTM puts and short a series of ITM puts(>=5%), but what confuses me is the n*5% bit as it's equivalent to long n 5% ITM puts.So I'd like to know how we should analyze the skew position here. Besides, is the buyer long vol or short vol and why? Thx

Long vol or short vol? Well, both. First just analyze that payoff for a single fixing date (n=1). I think of it as selling an OTM call (short vol),and buying an ATM put (long vol). In BS terms, the vega may easily change sign, for example, as a function of the underlyingprice, holding other terms constant depending upon which option component is dominating the position. The general rule is, unless your payoff is uniformly convex/concave (which yours isn't), there is no fixedsign to Value_{SS} or Value_V, where the subscripts indicate derivatives with respect to the underlyingprice (S) and volatility (V). There's some discussion of this point in App. 2.3 of my book for stoch. vol. models.