SPY Skew Analysis





Decoding Market Sentiment: How to Use Implied Volatility Skew to Your Advantage

Are you looking for an edge in your options trading? Do you want to understand market sentiment beyond just price action? Then you’ve come to the right place. In this post, we explore a powerful concept and tool—implied volatility skew—and show you how you can use it to gain deeper insights into the market using the Market Chameleon platform.

What Is Implied Volatility Skew?

At its core, implied volatility skew measures the relative difference in the implied volatilities of options with different strike prices but the same expiration date. In simpler terms, it’s a way of gauging the market’s perception of risk and the demand for various types of options—specifically puts versus calls.

There are two main types of skew:

  • Vertical Skew: This is the primary focus of the webinar. Vertical skew compares the implied volatilities of options with different strike prices for the same expiration date, allowing you to see how the market prices different levels of upside and downside risk.
  • Horizontal Skew: Also known as time skew, this type refers to the variation in implied volatility across different expiration dates, indicating how uncertainty changes over time.

Standardizing Skew Analysis for Better Insights

One challenge you face in options trading is that the "days to expiration" for options decrease over time, which can make it difficult to compare skew over different periods. Market Chameleon overcomes this by using a "30-day constant maturity option." This synthetic option is created with a weighted average of options around the 30-day mark, much like the VIX is calculated, providing a consistent benchmark to track how skew evolves over time—independent of time decay.

The 25-Delta Call vs. 25-Delta Put Comparison

To standardize vertical skew even further, the tool compares the implied volatility of 25-delta call options with that of 25-delta put options. Here’s how you can interpret the results:

  • No Skew: If the implied volatilities are equal, the market shows no bias.
  • Positive Skew: If the put’s implied volatility is higher than the call’s, it indicates greater demand for downside protection—a sign of increased bearish sentiment.
  • Negative Skew: If the call’s implied volatility is higher than the put’s, it suggests the market is leaning towards upside potential.

Learning from Historical Skew Trends

Implied volatility skew is not static; it fluctuates over time. The Market Chameleon tool provides you with a one-year historical chart of the skew, plotting the difference between the 25-delta put and call implied volatilities. To help you interpret this data, the tool overlays two key reference lines:

  • 20-Day Moving Average: Reflects short-term trends.
  • 250-Day Moving Average: Offers a long-term historical perspective.

For example, during the webinar on SPY skew analysis, the presenter highlighted that the current skew was slightly above both the 20-day and 250-day moving averages. This suggested a mild increase in bearish sentiment without an extreme demand for downside protection, even when overall volatility was elevated.

Skew and At-the-Money Implied Volatility

Understanding the relationship between skew and at-the-money (ATM) implied volatility is also critical. The tool plots the 30-day ATM IV alongside the skew, allowing you to determine if periods of high or low overall volatility are accompanied by significant changes in the put-call dynamic. In the webinar, despite ATM IV being at the 69th percentile, the skew did not indicate an overwhelming demand for protection, which provided reassurance about the market’s balance.

Comparing Skew Across Different Assets

Another insightful feature is the ability to compare the skew of different assets. For instance, by comparing the SPY ETF’s skew with that of the QQQ (Nasdaq 100 ETF), you can uncover divergences in market sentiment between sectors or market caps. The webinar presenter noted that the SPY’s skew was moving away a bit faster than QQQ’s—possibly due to higher trading volume in SPY—highlighting potential opportunities for strategic decision-making.

Key Takeaways from the Webinar

  • Consistent Put Dominance: The SPY’s put implied volatility has been consistently higher than the call’s over the past year, reflecting a steady demand for downside protection.
  • Mild Increase in Bearish Sentiment: Current skew levels slightly above historical averages suggest a modest uptick in bearish sentiment.
  • Balanced Volatility and Protection Demand: Even with elevated overall volatility, the skew analysis showed that the market isn’t demanding a disproportionate level of protection.

Empower Your Trading Decisions

By incorporating Market Chameleon’s implied volatility skew analysis into your trading toolkit, you can gain a clearer picture of market sentiment. You’ll be able to:

  • Compare current market conditions with historical trends
  • Evaluate the relative cost of puts versus calls
  • Identify subtle shifts in sentiment that might signal future opportunities

While no tool can guarantee profits, understanding these dynamics empowers you to make more informed decisions. By leveraging this analysis, you become better equipped to evaluate risk and uncover opportunities that align with your trading strategy.

Ready to dive deeper? Explore the tool and start refining your options trading strategy today on the Market Chameleon platform.


Financial Disclosure:
This blog post is for informational and educational purposes only and should not be considered financial or investment advice. Trading options involves significant risk, and you should consult a financial professional before making any investment decisions. Market Chameleon provides data and tools to support your analysis but does not guarantee any specific outcomes.


By understanding implied volatility skew, you’re one step closer to decoding market sentiment and enhancing your trading decisions. Happy trading!