To analyze and trade options skew patterns, focus on how implied volatility (IV) differs between strike prices. When IV is higher for out-of-the-money puts or calls, it reflects market sentiment like fear or bullishness. Traders use skew to select strategies like spreads or hedges based on market bias and volatility expectations.
What is Options Skew in Trading?
Options skew refers to the uneven distribution of implied volatility (IV) across different strike prices of the same expiry. Ideally, IV should be symmetrical, but due to demand differences, out-of-the-money puts often carry higher IV in falling markets, while calls may have higher IV in bullish environments. This skew can indicate market sentiment and risk perception.
Why Does Options Skew Matter?
Options skew gives insights into investor sentiment and where institutional traders expect volatility. A higher skew on put options may signal a bearish outlook or hedging activity, while a skew toward calls might indicate bullish sentiment. Understanding skew helps in pricing options fairly and choosing the right trading strategy.
How to Analyze Skew for Bullish or Bearish Bias?
To assess skew, observe if puts are more expensive (higher IV) than calls. This usually indicates bearish bias and fear in the market. If calls have higher IV, it can mean strong bullish expectations. Compare skew patterns across timeframes to confirm consistency in sentiment or to spot divergences ahead of news or earnings events.
What Strategies Use Options Skew?
Traders use skew to build positions like vertical spreads, ratio spreads, and risk reversals. For example, if puts have high IV, selling a put spread can be profitable. If calls are expensive, traders may sell covered calls or set up call credit spreads. Skew also helps in identifying mispriced options for arbitrage opportunities.
Where to Track Options Skew Live?
Many trading platforms and option analytics tools like NSE Option Chain, Sensibull, or Opstra provide live options skew data. These tools plot IV curves and make it easy to spot distortions across strikes and expiries. Keeping an eye on skew in volatile markets gives you a significant trading edge.
Options skew is a powerful tool to read market psychology and find trading opportunities. Whether you’re hedging, speculating, or using complex spreads, understanding how implied volatility varies across strike prices can help you fine-tune your trades and manage risk better.
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