Volatility Skew
Implied volatility differences across strikes
Volatility Skew shows how implied volatility (IV) varies across strike prices for a specific expiration, revealing market risk perception.
What is Volatility Skew?
Skew measures the difference in IV between out-of-the-money (OTM) puts and OTM calls. It reflects the market’s pricing of tail risk.
Skew Patterns
| Pattern | Shape | Meaning |
|---|---|---|
| Put Skew (normal) | Higher IV for lower strikes | Downside protection is expensive—fear of drops |
| Call Skew (reverse) | Higher IV for higher strikes | Upside is expensive—fear of missing rallies |
| Smile | High IV on both ends | Tail risk priced on both sides |
| Flat | Similar IV across strikes | Neutral risk perception |
Reading the Chart
- Two lines: Call IV and Put IV by strike
- Current price: Vertical reference line
- ATM IV: Baseline volatility level
- Steepness: How quickly IV changes from ATM
DTE Selector
Use the DTE dropdown to view skew for different expirations:
- Near-term (0-7 DTE): Event-driven skew, earnings plays
- Medium-term (30-60 DTE): Standard skew patterns
- Long-term (90+ DTE): Structural skew
Key Insights
- Steep put skew: Market fears downside—protective puts are expensive
- Flat or inverted skew: Complacency or bullish sentiment
- Skew changes: Shifts in risk perception
- Relative value: Find cheap/expensive options vs the skew
Use Cases
- Risk assessment: Steep skew = market expects volatility
- Option pricing: Identify relatively cheap or expensive strikes
- Strategy selection: Skew affects spread pricing
- Sentiment gauge: Skew reflects fear/greed
Note: Skew is one input for options pricing. Combine with term structure and historical volatility for complete analysis.
