What Is a “Volatility Skew” and What Does It Indicate?
Volatility skew, or volatility smile, is the empirical observation that implied volatility is not constant across all strike prices for options with the same expiration date. A common skew is when OTM put options have higher IV than ATM options, and OTM call options have lower IV.
This indicates that the market perceives a higher risk of a sharp price drop (left tail risk) than a sharp price increase, reflecting a persistent demand for downside protection.
Glossar
Unpredicted Difficulty
Challenge ⎊ Within cryptocurrency derivatives and options trading, unpredicted difficulty manifests as deviations from anticipated market behavior, often stemming from unforeseen regulatory shifts, technological vulnerabilities, or exogenous shocks impacting underlying asset valuations.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
Volatility Skew
Bias ⎊ This term describes the non-symmetrical relationship between implied volatility levels for options with different strike prices, indicating a market bias toward expecting larger moves in one direction.
Strike Prices
Definition ⎊ Strike Prices represent the fixed price at which the holder of an option contract has the right, but not the obligation, to buy or sell the underlying cryptocurrency asset upon exercise.