Option Skew
Overview
The Option Skew indicator highlights the variance in implied volatility (IV) across options with differing strike prices but the same expiration date. It reveals market expectations of volatility for in-the-money (ITM), at-the-money (ATM), and out-of-the-money (OTM) options. A positive skew indicates that OTM puts have higher IVs, suggesting market anticipation of downward movement, while a negative skew means OTM calls have higher IVs, pointing to bullish market sentiment. This indicator is pivotal for traders to understand market sentiment and potential price directions.
Interpretation
Examples
Capitalizing on Positive Skew for Bearish Trends: When option skew is positive, indicating a fear of downside, traders can align with this sentiment by taking short positions in futures contracts. This strategy aims to leverage the market's anticipation of a decline, positioning traders to profit from expected downward movements in the underlying asset.
Exploiting Negative Skew in Bullish Markets: A negative skew, signaling expectations of upward price movement, can prompt traders to adopt long positions in futures contracts. This approach seeks to capture gains from the bullish trend, aligning futures trading strategies with the optimistic market outlook indicated by the lower IVs on OTM calls.
Skew as a Trend Confirmation Tool: Traders can use changes in option skew as a means to confirm underlying market trends. An increasing positive skew could reinforce a bearish outlook, leading traders to consider increasing their short positions in futures. Conversely, a shift towards a more negative skew might confirm bullish sentiment, suggesting an opportunity to expand long positions in futures.
Dynamic Position Adjustment Based on Skew Changes: As the option skew evolves, indicating shifts in market sentiment, traders can adjust their futures positions accordingly. An intensifying positive skew might call for an augmented short futures strategy, while a diminishing skew or a move towards negativity could warrant an increase in long futures positions, allowing traders to align with the market's changing expectations.
Indicator Triggers
Available Basic Triggers:
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