Open interest skew refers to the uneven distribution of open options contracts across different strike prices for a given expiry. It quantifies the relative concentration of outstanding call options versus put options at various price levels. This skew provides insights into the market’s collective directional bias and expectations of future price ranges. A significant imbalance indicates where market participants are most heavily positioned.
Analysis
Analyzing open interest skew involves comparing the number of open calls to open puts at strikes above and below the current underlying price. A higher open interest in out-of-the-money calls relative to puts might suggest a bullish sentiment or a belief in upside potential. Conversely, a heavier concentration of out-of-the-money puts could indicate bearish sentiment or hedging against downside risk. This distribution is a powerful sentiment indicator.
Application
Traders apply open interest skew analysis to identify potential support and resistance levels, anticipate areas of high liquidity, and gauge market sentiment. Large concentrations of open interest at specific strikes can act as “magnets” for price action as expiry approaches, influencing hedging activities by option writers. For quantitative strategies, understanding this skew informs optimal strike selection for various options spreads and risk management adjustments. It enhances the precision of directional bets.
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