Volatility Skew


DEFINITION of 'Volatility Skew'

The difference in implied volatility (IV) between out-of-the-money, at-the-money and in-the-money options. Volatility skew, which is affected by sentiment and the supply/demand relationship, provides information on whether fund managers prefer to write calls or puts.

Also known as "vertical skew".

Volatility Skew

BREAKING DOWN 'Volatility Skew'

A situation where at-the-money options have lower IVs than out-of-the-money options is sometimes referred to as a volatility "smile", due to the shape it creates on a chart (as above). In markets such as the equity markets, a skew occurs because money managers usually prefer to write calls over puts.

  1. Implied Volatility - IV

    The estimated volatility of a security's price.
  2. Derivative

    A security with a price that is dependent upon or derived from ...
  3. Volatility Smile

    A u-shaped pattern that develops when an option’s implied volatility ...
  4. Call

    1. The period of time between the opening and closing of some ...
  5. Option

    A financial derivative that represents a contract sold by one ...
  6. In The Money

    1. For a call option, when the option's strike price is below ...
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  1. What is the relationship between implied volatility and the volatility skew?

    The volatility skew refers to the shape of implied volatilities for options graphed across the range of strike prices for ... Read Full Answer >>
  2. How is implied volatility used in the Black-Scholes formula?

    Implied volatility is derived from the Black-Scholes formula and is an important element for how the value of options are ... Read Full Answer >>
  3. How can I find out which stocks also trade as options?

    The trading of options has become increasingly popular among retail investors as they become aware of the many different ... Read Full Answer >>
  4. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
  5. What is the utility function and how is it calculated?

    In economics, utility function is an important concept that measures preferences over a set of goods and services. Utility ... Read Full Answer >>
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    Forward contracts and call options are different financial instruments that allow two parties to purchase or sell assets ... Read Full Answer >>

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