What Is the Volatility Skew in Options Pricing?
Volatility skew, or smile, is the phenomenon where options with the same expiration date but different strike prices have different implied volatilities. Typically, out-of-the-money (OTM) put options (lower strikes) have higher implied volatility than OTM call options (higher strikes) or at-the-money options.
This reflects the market's perception of higher risk for a large downward move (a "crash").
Glossar
Cryptocurrency Options
Volatility ⎊ Cryptocurrency options, fundamentally derivatives, grant the holder the right, but not the obligation, to buy or sell a specified cryptocurrency at a predetermined price on or before a specific date.
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.
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.
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.
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 in Options
Skew ⎊ Volatility skew describes the phenomenon where implied volatility for options with the same expiration date varies systematically across different strike prices.