Volatility Skew Arbitrage

Volatility skew arbitrage involves exploiting the difference in implied volatility between options with different strike prices. In many markets, out-of-the-money put options trade at higher implied volatilities than out-of-the-money call options, creating a skew.

Traders identify when this skew deviates from historical norms or fundamental expectations and take positions to profit from its normalization. This might involve selling expensive options and buying relatively cheaper ones.

In crypto, this is often driven by intense demand for downside protection during market downturns. The strategy requires sophisticated modeling to ensure the trade is truly mispriced and not just reflecting higher perceived risk.

It is a form of relative value trading that ignores directional price movement.