Option Volatility Skew
Volatility skew is the difference in implied volatility between the strikes of one expiration. Typically, downside puts trade at higher implied volatility than at-the-money options, and upside calls at lower.
What is volatility skew?
Volatility skew is the difference in implied volatility between the strike prices of one expiration. If every strike traded at the same implied volatility, the skew would be "flat" (or "straight"). That is uncommon: buying and selling push some strikes to higher implied volatility and others lower.
On a typical stock or index, downside strikes carry higher implied volatility than the at-the-money strike, and upside strikes lower. Two reasons are usually given: investors pay up for puts that protect against a drop, and stocks have historically fallen faster and further than they rise, with drops bringing more uncertainty. Plotted across strikes, implied volatility then slopes down from the low strikes to the high ones instead of lying flat.
How Market Chameleon measures skew
- Against the at-the-money strike. For each expiration we compare the implied volatility of the 25-delta put (or the strike closest to it) and of the 25-delta call with the at-the-money implied volatility (ATM IV). Put skew = 25-delta put IV ÷ ATM IV − 1, shown as a percent; the same for the call. A 25-delta put skew of +25.0% means that strike's implied volatility is 25% higher than the ATM IV; a 25-delta call skew of −20.0% means 20% lower.
- A constant 30 days out. To follow skew over time we also work out 30-day values (IV30) for the 25-delta put, the 25-delta call and the at-the-money option, always looking 30 days ahead. That keeps changes in the stock price, the ATM volatility or the time left to an expiration from distorting the comparison.
- Put minus call. A stock's Skew page tracks the 30-day 25-delta put IV minus the 25-delta call IV, in volatility points, over the past year, with its 20-day and 250-day moving averages and its 52-week average, high and low.
- Skew indicator. Today's put-minus-call spread is compared with its average over the past 250 trading days. More than two standard deviations above the average reads "Very Bearish", more than one "Bearish", and above it by more than 0.05 volatility points "Slightly Bearish". The same distances below read Slightly Bullish, Bullish and Very Bullish. Anything closer is "In Line with Historical".
The indicator describes how options are priced against the stock's own history: a higher reading means downside puts cost more than usual relative to upside calls. It is not a forecast of where the stock will go.
What you can find out
What is 25-delta skew?
It compares the implied volatility of the 25-delta option with the at-the-money option of the same expiration. Using delta rather than a fixed dollar strike puts the comparison at a similar point on every stock, whatever its price or volatility, so skew can be compared across stocks and over time. See SPY's skew by expiration
Why do puts have higher implied volatility than calls?
At the same strike and expiration, a call and a put trade at about the same implied volatility (put-call parity ties their prices together). The difference people notice is between strikes: out-of-the-money puts below the stock price usually trade at higher implied volatility than out-of-the-money calls above it, because of demand for downside protection. It isn't fixed: skew can steepen, flatten, or tilt toward the calls when demand for upside calls is strong. See SPY's IV smile
Is a stock's skew steeper than usual?
The 25-Delta Put vs. Call tab of a stock's Skew page charts the 30-day put-minus-call spread for the past year against its 20-day and 250-day averages, lists the last 20 days, and gives the Current Skew Indicator. See SPY's skew history
How does skew differ from one expiration to the next?
Compare Expirations draws today's curve for several expirations on one chart, by strike or by delta. IV Smile Graph compares one expiration with each of the previous 10 business days. The Activity page lists the 25-delta put and call skew for every expiration and how each moved since the day before. Compare SPY's expirations
Which stocks have the steepest skew today?
The Options By Expiration screener has a Skew tab with the 25-delta put and call implied volatility against the ATM for each stock and expiration. The Stock Screener has a Volatility Skew Indicator column. Open the Options By Expiration screener
Where to find it
For one stock: Volatility › Skew in the stock's menu, for example /Overview/SPY/VolatilitySkew/. Skew for each expiration is on Options › Activity, in the Breakdown by Expiration table (/Overview/SPY/OptionSummary/). Across stocks: Screeners › Options By Expiration, Skew tab.
A worked example
These figures come from a past SPY expiration (an older option chain, when SPY traded near $212), using the strikes closest to 25 delta. They show how the numbers are worked out, not today's values.
| Option | Strike | Delta | Implied volatility | Skew vs. ATM |
|---|---|---|---|---|
| Out-of-the-money put | 206 | −0.27 | 20.5 | +18.5% |
| At the money | 212 | 0.50 | 17.3 | - |
| Out-of-the-money call | 216.5 | 0.26 | 14.1 | −18.5% |
- Put skew: 20.5 ÷ 17.3 − 1 = +18.5%. Call skew: 14.1 ÷ 17.3 − 1 = −18.5%.
- Put minus call: 20.5 − 14.1 = 6.4 volatility points, the number the Skew page charts over time.
- Put over call, as on the IV30 Skew by Delta tab: 6.4 ÷ 14.1 = +45.4%.
In the same chain, the 206 call and the 206 put both traded near 20.5 implied volatility: the skew is between strikes, not between calls and puts at one strike.
FAQ
- What is a volatility smile?
- The curve of implied volatility across strikes. When out-of-the-money puts and calls both trade above the at-the-money implied volatility, the curve turns up at both ends like a smile. On stocks it more often slopes down from the low strikes to the high ones, which is what is usually called skew.
- Does a steep skew mean the stock will fall?
- No. It means downside puts are priced high relative to the at-the-money option and upside calls: more demand for protection. It describes option prices, not a forecast.
- How do traders use skew?
- Some use it to see whether options are pricing more downside risk than usual, some take the other side expecting skew to move back toward its average, and some compare skew across similar stocks. Market Chameleon shows the data; it doesn't recommend trades.
- How is skew related to a risk reversal?
- A risk reversal buys an out-of-the-money call and sells an out-of-the-money put. When downside puts trade at higher implied volatility than upside calls, the put sold pays for more of the call.
Related
Volatility Options By Expiration screener Implied Volatility Rankings Risk ReversalTerms on this page
Implied volatility Delta At the money (ATM) IV30Market Chameleon provides data, not investment advice.