What Is a ‘Volatility Skew’ in Options Pricing?
Volatility skew is a phenomenon where options with the same expiration date but different strike prices have different implied volatilities. Historically, a 'smirk' (higher IV for OTM puts than OTM calls) is common, reflecting higher demand for downside protection (puts) due to fear of market crashes.
Glossar
Equity Options
Contract ⎊ Equity options are derivative contracts granting the holder the right, but not the obligation, to buy or sell a specific quantity of an underlying stock at a predetermined price before a set expiration date.
Downside Protection
Mitigation ⎊ Downside protection, within cryptocurrency and derivatives markets, represents strategies designed to limit potential losses stemming from adverse price movements.
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.
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.
Volatility Curve
Skew ⎊ A volatility curve, within cryptocurrency options markets, represents the implied volatility of options contracts across different strike prices for a specific expiration date.
Expiration Date
Deadline ⎊ The Expiration Date marks the definitive deadline for the option contract, after which the right to exercise or the obligation to perform ceases.