10 Trades We Are Thankful For
tastytrade logo
The Skinny On Options Data ScienceThe Skinny Around Skew | Jan 28, 2016
Up Next
    The Skinny On Options Data ScienceThe Skinny Around SkewJan 28, 2016

    Most option traders know that puts trade for more than calls and this is called skew but we are here to help you visualize this for a more thorough understanding and additionally to introduce you to the skew index. Dr. Data (Michael Rechenthin, Ph.D.) is here to improve your options health.

    Dr. Data began with the distribution curve of market moves. It's clear that markets have many more huge down moves than up moves. This is why there is skew. Our good Doctor followed that with a graph from January 20, 2016 after the S&P 500 had declined by 9% in just two weeks. It showed the SPY options with 30 days to expiration (DTE) charting the implied volatility (IV) versus the strikes distance from the closing price (with the closing price in the center). He explained the chart and its importance. The next chart from the same day is more like what one usually sees as Prices replaced IV on the y axis . The skew is still apparent.

    Two other charts of the same setup as the last two were displayed next. The data was from a normal day from a couple of years ago. Here one could see the skew “smile”. The skew is still obvious but is nowhere near as pronounced as in the earlier pair of charts.

    The Skew Index was then explained. The Skew Index measures the slope of the implied volatility curve. It is used to judge the “perceived tail risk”/”Black Swan” risk. A higher slope means the market perceives a greater risk of a large move. Dr. Data put this into historical context, where one can find the number and explained that it is not a real time number but is from the previous day.

    Mike's final display was a table showing a column of Skew Index readings from a high 145 down to 120 in five point increments. The other columns were the percentage chance of a 2 and 3 standard deviation move for those readings.

    Watch this segment of the “Skinny on Options Data Science” with Tom Sosnoff, Tony Battista and Dr. Data for the valuable takeaways and a better understanding of Skew and the Skew Index.

    More like this

    tastytrade content is provided solely by tastytrade, Inc. (“tastytrade”) and is for informational and educational purposes only. It is not, nor is it intended to be, trading or investment advice or a recommendation that any security, futures contract, transaction or investment strategy is suitable for any person. Trading securities can involve high risk and the loss of any funds invested. tastytrade, through its content, financial programming or otherwise, does not provide investment or financial advice or make investment recommendations. Investment information provided may not be appropriate for all investors, and is provided without respect to individual investor financial sophistication, financial situation, investing time horizon or risk tolerance. tastytrade is not in the business of transacting securities trades, nor does it direct client commodity accounts or give commodity trading advice tailored to any particular client’s situation or investment objectives. Supporting documentation for any claims (including claims made on behalf of options programs), comparison, statistics, or other technical data, if applicable, will be supplied upon request. tastytrade is not a licensed financial advisor, registered investment advisor, or a registered broker-dealer. Options, futures and futures options are not suitable for all investors. Prior to trading securities products, please read the Characteristics and Risks of Standardized Options and the Risk Disclosure for Futures and Options found on 

    tastytrade is a trademark/servicemark owned by tastytrade.

    tastyworks, Inc. ("tastyworks") is a registered broker-dealer and member of FINRA, NFA and SIPC. tastyworks offers self-directed brokerage accounts to its customers. tastyworks does not give financial or trading advice nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of tastyworks’ systems, services or products. tastyworks is a wholly owned subsidiary of tastytrade, Inc (“tastytrade”).

    tastyworks, Inc. (“tastyworks”) has entered into a Marketing Agreement with tastytrade (“Marketing Agent”) whereby tastyworks pays compensation to Marketing Agent to recommend tastyworks’ brokerage services. The existence of this Marketing Agreement should not be deemed as an endorsement or recommendation of Marketing Agent by tastyworks. tastytrade is the parent company of tastyworks. tastyworks and Marketing Agent are separate entities with their own products and services. tastytrade has different privacy policies than tastyworks.

    Quiet Foundation, Inc. (“Quiet Foundation”) is a wholly-owned subsidiary of tastytrade The information on is intended for U.S. residents only. All investing involves the risk of loss. Past performance is not a guarantee of future results. Quiet Foundation does not make suitability determinations, nor does it make investment recommendations. You alone are responsible for making your investment and trading decisions and for evaluating the merits and risks associated with the use of Quiet Foundation’s systems, services or products.

    © copyright 2013 – 2022 tastytrade. All Rights Reserved. Applicable portions of the Terms of use on apply. Reproduction, adaptation, distribution, public display, exhibition for profit, or storage in any electronic storage media in whole or in part is prohibited under penalty of law, provided that you may download tastytrade’s podcasts as necessary to view for personal use.