Options Skew

Options skew is the sitch where options market is like, all over the place with their implied vibes (volatility) — not vibing the same across different strike zones, even if they're chillin' on the same asset with the same expiration countdown. 🤯

Normal vs. Skewed Volatility Surface

Peep this, in a normal (we’re talking basic) volatility surface, the implied vibes are keepin' it level, like same-same across all strike spots for that time frame. 😌

But IRL, the vibes tend to wander, so you get a whole “skew” or “smile” situation when you plot them against those strike spots. 📈😄

Types of Options Skew

1. Volatility Smile

• With a smile, them implied vibes are poppin' higher for options with strike zones way above (like, deep out-of-the-money calls or deep in-the-money puts) or way below (flip that) the existing asset price. 😏
• Your at-the-money squad is usually chillin' with less implied vibes compared to those deep ones. 😎

2. Volatility Skew

• When skew’s in effect, the implied vibes are lit for either the in-the-money options (low strike calls or high strike puts) or out-of-the-money peeps (high strike calls or low strike puts), but not both. 🚀
• This makes for a whole uneven, skewed vibe surface. 🤷‍♀️

Causes of Options Skew

Options skew be happenin' ‘cause of a whole mess of things:

• Market Participants’ Expectations: People’s crystal ball predictions about mad price moves and possible wild events takin’ the asset price on a crazy ride. 🎢
• Supply and Demand Dynamics: It’s all about them hedging moves, risk-takers doing the most, and market makers trying to manage their cosmic fallout. ⚖️