Volatility Skew is a complex options pricing concept. Volatility skew explains why deep out of the money OTM option will tend to have higher implied volatility than an at the money ATM option. Your initial reaction would be to question why an option so far OTM has any value at all… and why it would carry such high implied volatility.

The deep OTM option has value because the options market maker must have some value assigned to options OTM… even if the stock has low chance of ever reaching the strike. And the abnormally high implied volatility can be explained quite easily…. On the flip side, if no one ever bought the option for. For traders with options strategies focused on buying and selling volatility… volatility skew is important.

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names in the business, Marcus has served as an Options Strategist for a tips on binary options trading of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of skew option strategies Bank of New York.

Options Trading: Volatility Skew, Part II

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Option Volatility: Vertical Skews and Horizontal Skews

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Trading Volatility Skew | What is Volatility Skew?

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