To analyze skew in implied volatility for trading, look at how the implied volatility differs across various strike prices of options on the same stock or index. A steep skew can indicate market expectations of large moves or fear of downside risks. Traders use this skew to identify mispriced options or anticipate potential price movements in the underlying asset. It’s a useful indicator for both directional and volatility-based trading strategies.

What is implied volatility skew in options trading?

Implied volatility skew refers to the difference in implied volatility (IV) across various strike prices for the same expiry in options trading. Typically, out-of-the-money (OTM) puts have higher IV than OTM calls, especially in index options like Nifty. This difference forms the volatility "skew." It's often a result of market participants buying more puts for protection, which raises their IV. Skew provides insight into trader sentiment, fear levels, and potential directional bias in the market.

How do you detect volatility skew in a live market?

You can detect volatility skew by using an options chain provided by brokers or platforms like NSE, Angel One, or TradingView. Look at the implied volatility values for each strike price. If the IV of OTM puts is higher than ATM or OTM calls, there is a negative skew. If calls have higher IVs, it’s a positive skew. Visual tools like IV charts help clearly spot these patterns. Analyzing changes in skew across time also reveals shifting trader sentiment and risk perception.

Why does implied volatility skew exist in the market?

Volatility skew exists due to the behavior of traders and hedgers. Most investors use puts for protection during uncertain times, which increases the demand for puts and pushes up their IV. On the other hand, calls are less in demand, resulting in lower IV. Skew is also influenced by past price behavior, expected news, earnings reports, and institutional hedging activity. It's a real-time reflection of fear or confidence in the market direction.

How to trade based on volatility skew?

You can trade based on volatility skew by using strategies like vertical spreads, ratio spreads, or skew-based straddles. For example, if puts have higher IV, you might sell put options (to benefit from premium decay) and buy calls, anticipating a bounce. If skew is extreme, it might suggest the market is overly fearful and a reversal may be near. Advanced traders also use calendar spreads to take advantage of IV differences across expiries and strike prices.

What does a steep skew tell about market sentiment?

A steep skew (especially when OTM puts are much more expensive than calls) often signals panic or fear in the market. It suggests that traders are hedging against sharp downside moves. Such skew patterns commonly appear before key announcements like RBI policy, budget day, or during geopolitical tensions. Recognizing steep skews early helps in designing contrarian trades or playing safe with hedged positions.

Can IV skew help identify breakout or breakdown zones?

Yes, IV skew can often give early clues about possible breakout or breakdown areas. If IV sharply increases at specific OTM strikes (either calls or puts), it indicates where big players are positioning for a move. These strike levels often act as future support or resistance. By tracking how skew shifts during the day, traders can align their intraday or positional trades accordingly.

Which tools are best for analyzing IV skew in India?

In India, tools like Sensibull, Opstra, Fyers One, Angel One Smart API, and TradingView offer great visualization for IV skew. You can also use NSE’s option chain and manually compare IVs across strikes. These platforms help spot trends, analyze open interest, and detect changes in volatility skew — all critical for advanced options trading strategies.