Skewness in Returns

Skewness measures the asymmetry of the probability distribution of returns around the mean. Positive skewness implies that the tail on the right side of the distribution is longer or fatter, suggesting more frequent small losses and occasional large gains.

Conversely, negative skewness implies a longer left tail, indicating more frequent small gains and occasional large losses. In options trading, skewness is often observed in the volatility smile, where out-of-the-money puts are priced higher than out-of-the-money calls.

This reflects the market's fear of sudden, sharp downturns. Analyzing skewness helps traders understand the bias in market sentiment.

It is a vital component in determining the fair value of derivative contracts.