Skew in options trading is a way to understand market sentiment. It shows whether traders are more afraid of prices going down or hopeful about prices going up. By studying skew, you can see which strike prices are more expensive and why. This gives you an edge in choosing the right option strategy, managing risk, and predicting future market direction.

What is skew in options trading?

Skew in options trading refers to the difference in implied volatility (IV) between different strike prices of options on the same underlying asset. Normally, we expect implied volatility to be similar across all strike prices. But in reality, it's not. Sometimes, out-of-the-money (OTM) puts or calls are more expensive than expected. This price difference is called "skew" and it helps traders understand where the market thinks big moves might happen.

If OTM puts are more expensive, it may mean traders are afraid of a price drop. If OTM calls are costlier, it could mean the market is expecting a big rise. Skew is like reading the emotions and expectations of traders in the market.

Why is skew important in options trading?

Skew is important because it helps traders understand what the market is expecting. It tells you if people are more worried about a fall or hopeful about a rise. For example, if put options are more expensive, it may show fear or demand for protection. If call options are priced higher, it may mean traders expect a big upward move.

This information can help you avoid risky trades and focus on strategies that fit the current market mood. Skew is not just about numbers—it's about understanding market psychology.

What are the different types of skew in options?

There are mainly three types of skew:

• Normal Skew: Put options have higher implied volatility than calls. This means traders are more worried about downside risk.
• Reverse Skew: Call options have higher implied volatility. This usually happens when there’s a lot of demand for calls, like in bullish markets or before big news events.
• Flat Skew: Volatility is the same across all strike prices. This is rare and usually means the market is calm and balanced.

By knowing the type of skew, you can guess how traders are positioning themselves and what they are expecting from the market.

How does skew help in selecting option strategies?

Skew helps traders pick the best strategy by showing which options are overpriced or underpriced. For example, if puts are expensive, you might want to sell them using a put credit spread to benefit from high premiums. If calls are too costly, you could avoid buying them and instead use bear call spreads or iron condors.

Skew helps you avoid buying overpriced options and instead use selling strategies or spreads that give better risk-reward. It also helps you avoid surprises by preparing you for expected price moves.

How to check skew using option chain?

You can easily check skew by looking at the option chain on platforms like Angel One or NSE. Look at the implied volatility (IV) next to each strike price. If IV is higher on the put side, it means fear. If IV is higher on the call side, it means hope or bullishness. This simple check gives you great insight into what most traders are expecting.

Also, look at the difference between at-the-money and out-of-the-money option prices. The bigger the difference, the stronger the skew.

Does skew change over time and how to track it?

Yes, skew is not constant. It changes with news, earnings, economic data, or sudden market moves. You should check skew regularly before entering a trade. Use tools like IV charts, option analytics, or trading platforms like Angel One to track changes in skew over time.

By tracking skew, you can stay ahead of the market. You’ll be able to adjust your trades, close risky positions, or find new opportunities based on how other traders are reacting.