Volatility Skew

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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

INVESTOPEDIA EXPLAINS '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.

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RELATED FAQS
  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?

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  4. What risks should I consider taking a short put position?

    The risks to consider before taking a short put position are the odds of sustained weakness in the asset price and a spike ... Read Full Answer >>
  5. What happens if a software glitch fails to execute the strike price I set?

    If you've ever suffered the frustrating experience of having an order not filled or had a strike price fail to execute because ... Read Full Answer >>
  6. In what market situations might a short put be a profitable trade?

    Short puts would be a profitable trade in low-volatility bull markets or range-bound markets. Selling puts is a strategy ... Read Full Answer >>
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