Skew and Kurtosis Management

Skew and kurtosis management is the practice of monitoring and adjusting for the non-normal distribution of asset returns. Skewness refers to the asymmetry of the return distribution, while kurtosis measures the thickness of the tails, or the likelihood of extreme outliers.

In financial markets, returns are rarely normally distributed; they often exhibit negative skew and high kurtosis. This means that large, negative moves occur more frequently than expected.

In options trading, this is reflected in the volatility skew, where puts are priced differently than calls. Traders manage this by adjusting their portfolio construction to mitigate the risk of extreme events.

This might involve buying protective puts or selling volatility in specific ranges. Effective management ensures that a portfolio is not overly exposed to the risks identified by these statistical measures.

It is a sophisticated approach to risk that goes beyond simple variance or standard deviation. It aligns trading strategy with the reality of market distribution.