What Is a Volatility Skew in Options Trading?
A volatility skew, or volatility smile, is the phenomenon where options with the same expiration date but different strike prices have different implied volatilities. The Black-Scholes model assumes a single implied volatility for all strikes.
In reality, out-of-the-money puts (lower strikes) often have higher implied volatility than at-the-money options, creating a "skew." This reflects market perception of a higher probability for extreme downward movements.
Glossar
Volatility Skew in Options
Skew ⎊ Volatility skew describes the phenomenon where implied volatility for options with the same expiration date varies systematically across different strike prices.
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.
Decentralized Options Exchanges
Architecture ⎊ ⎊ Decentralized options exchanges represent a paradigm shift in derivatives trading, leveraging blockchain technology to eliminate intermediaries and establish peer-to-peer contract execution.
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.