Skew and Volatility

Skew and volatility refer to the distribution of implied volatility across different strike prices in options and derivative markets. Skew indicates the market's preference for either call or put options, revealing sentiment about the direction and risk of the asset.

High skew often suggests that traders are paying a premium to hedge against downside risk. Volatility is a measure of the expected price movement of the asset, and it is a key input in pricing models.

Understanding skew and volatility is crucial for option traders, as it helps them identify mispriced contracts and construct strategies that profit from changes in market expectations. These metrics are fundamental to the quantitative analysis of derivative risk.