Volatility Skew Help
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Volatility Skew
The Volatility Skew can be charted for any symbol that has options. Enter the symbol in the text box labeled Symbol and click 'Go'. The implied volatility for each strike price will be charted. Data for both puts and calls will be displayed.
Contracts that are extremely deep in or out of the money are omitted, as are contracts for which there is insufficient data to compute volatility. If there is insufficient volatility data for strikes near the money a warning will be displayed in lieu of a chart.
1)
Enter the symbol
2)
Click Go
3)
Optional: limit the chart to a specific expiration by
clicking on the desired expiration date
4)
Optional: Select the report date. Your subscription level determines how much data is available.
5)
Volatility skew can be viewed using 1 to 10
days of data. This feature is useful for examining skew on lightly traded
options, or for detecting trends in skew data.
Implied volatility data can be displayed for all expiration dates or for an individual expiration date.
All - The average implied volatility and the sum of the option volume is computed for each option with the same strike, then charted by strike. By Expiration - The implied volatility and the option volume for each strike is charted.
A Stock Has More Than One Volatility
Expensive options are a strong indicator of pending changes in a stock's price. The measure of expensiveness is the stock's volatility. At Optionistics, all the options for a listed stock are analyzed to derive a single measure of volatility on the stock. This singular measure tells only whether the overall stock volatility is high, but says nothing about the direction of the impending stock movement.
What Is Skew? Theoretically, all options for a stock should trade with the same measure of volatility and at the
money calls and puts with the same strike and expiration should have the same price. In practice, the
demand for individual option contracts can drive up the price of some of the options on a stock
and not others. Higher call volume does not necessarily mean more call buyers. Call traders may be selling
calls. It is not the disparity in volume, but the disparity in the volatility of calls vs. puts
that indicates the side (buy vs. sell ) that call traders are taking. If call volatilities are
higher than put volatilities, this indicates that traders are buying calls. An excess of call
buyers reveals a skew that favors the stock price going up. A similar argument can be made for expensive puts.
High volume and low volatility indicates that option contracts are being sold. High volume and
high volatility indicates option contracts are being purchased.
There are two types of skew, time skew and strike skew. Time skew is a measure of the disparity of option volatility for option contracts with the same price but different expirations. Strike skew is the measure of the disparity of option volatility for option contracts with different strikes but the same expiration. Traditional models for option pricing tend to price out of the money options lower than near the money options. As a result, computing volatility from the current price of options results in inflated volatilities as options become deeper in or out of the money, which results in the skew chart taking on a smile like curve. Nonetheless, the cost of calls and puts should maintain parity at the same strike, that is, calls and puts at the same strike should have the same volatility. Often that is not the case, as can be seen in the Mar 16, 2006 Volatility Skew chart for AGEN below. The in the money puts were significantly more expensive than similar calls, indicating both put buying and/or call selling at both the 5 and 7.5 dollar strikes. AGEN dropped approximately 50% in the 2 week period that followed.
Higher volatilities in near the money or in the money calls vs. puts indicates an abundance of call buyers, which is conventionally viewed as bullish. An abundance of volume in the out of the money call, coupled with low volatility, reveals out of the money call sellers. Such activity may not be a strong indicator of direction, except to suggest that options traders do not anticipate the stock rising beyond the out of the money call's strike price. This is a neutral indicator.
The skew is a valuable indicator that shows option traders' biases toward the stock. Whatever notion you may have regarding the impending direction of a stock's price, check the volatility skew first, and see where the option traders are putting their money.
Volatility Skew charts are only available to registered members.
Finding Volatility Skew
Stocks with disparities in call and put volatilities can be identified using the Volatility Skew Finder. The Volatility Skew Finder can find stocks with greater volatilities in the calls vs. puts, which is bullish, and puts vs. calls, which is bearish.
The Volatility Skew Finder is only available to registered members.