Volatility Skew is the difference in the Implied Volatility between Out of the Money Calls and Out of the Money Puts. Very High Skew Numbers could suggest a Strong Bias in the view of the market’s opinion of the Stock/Index. For Example, if the Skew Suddenly Drops, it could suggest that there is a rumor afloat and the market is getting Nervous about the downside of a Stock/Index and thus loading up on Puts and Selling Calls.
There are two types of Skew , Time-Skew and Strike-Skew. Time skew is a measure of the disparity of option volatility for option contracts with the same price but different expirations. Strike Skew is the measure of the disparity of Options Volatility for Option contacts with different Strikes but the same expiration.
The Skew is a valuable indicator that shows Option Traders’ biases towards the Stock. Whatever notion one may have Regarding the impending direction of a stock’s Price, it is Prudent to check the Volatility Skew First , and se where the Options Traders are Putting Money.
Special Thanks to Mr. A. N. Sridhar For this Valuable Works On Volatility Skew.
