IV Skew Analysis: How to Read Put and Call Volatility Skew in Options Trading

Learn IV skew analysis, put and call skew, volatility smiles, and term structure. Explore options volatility with the SecurePutCalls surface tool.

When people examine an options chain, they usually pay attention to the strike price, the expiration date, the premium, and the open interest. Although these figures are helpful, they don't give the full picture. Two options relating to the same stock can have different implied volatility figures even if they expire on the same day. If you understand why this is so, you will be able to gain a more thorough insight into how the options market is pricing possible risk. It is here that IV skew analysis proves to be useful. Implied volatility skew refers to the way in which implied volatility varies with different strike prices or, in certain cases, with different options that have similar characteristics. Rather than considering a single volatility figure by itself, traders look at the shape of volatility throughout the options chain. This enables them to determine if the market is attributing relatively more volatility to downside puts, to upside calls, or to options that are near the current stock price. Volatility skew might appear complicated to people who are just starting out since it covers a number of related concepts such as implied volatility, strike prices, expiration dates, options pricing, and market expectations. The good point is that you don't need a strong knowledge of mathematics in order to understand the basic procedure. If you learn how to compare volatility at different strikes, how to identify put and call skew, look at the steepness of the skew, and make use of a volatility surface, then you will be able to establish a more organized method of carrying out options volatility analysis. The guide describes the method of interpreting volatility skew, explains how it is different from a volatility smile, and shows how tools like the SecurePutCalls Volatility Surface can be used to organise the information. What Is Implied Volatility? Implied volatility , which is generally known as IV, is the volatility figure that is mathematically implied by the market price of an option. It shows the level of future price movement that is consistent with the current premium of the option when using an options pricing model. Unlike historical volatility, which measures the extent of an asset's past movements, implied volatility is calculated from current market prices. For example, imagine that a stock is trading at $100 and that both a call option with a $105 strike price and a put option with a $95 strike price expire in 30 days. The premiums of these options are influenced by a number of factors such as the price of the stock, the strike price, the time until expiry, interest rates, dividends, and implied volatility. In this case, if the market price of the option is relatively high in comparison to the other inputs of the model, the implied volatility derived from that price will also be higher. It is necessary to realise that IV cannot be regarded as a direct prediction of the price at which the stock will trade. A high IV does not mean th