Volatility Skew

What is the 'Volatility Skew'

The volatility skew is 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.

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RELATED FAQS
  1. What is the relationship between implied volatility and the volatility skew?

    Learn what the relationship is between implied volatility and the volatility skew, and see how implied volatility impacts ... Read Answer >>
  2. How does implied volatility impact the pricing of options?

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  3. Why should I consider buying an option if it's out-of-the-money?

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  4. What is a volatility smile?

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