Volatility Skew
Canonical definition, formula, interpretation, and API reference.
Definition
Asymmetry in implied vol between OTM puts and OTM calls at the same delta. High skew = expensive downside protection.
Formula
Skew_25d = IV(25d put) - IV(25d call)
Measured at the 25-delta level. Also includes smile_ratio and tail_convexity.
Inputs
25d put IV25d call IVATM IV
Output
skew_25dsmile_ratiotail_convexity
Interpretation
- High skew (>5pts): institutional hedging demand
- Low skew (<2pts): calm, balanced markets
- Negative skew (rare): squeeze/melt-up conditions
API Reference
Endpoint
GET /v1/volatility/{symbol}
Tier
Growth+
Response field
skew_profiles[].skew_25d, smile_ratio
Why Volatility Skew Matters for Trading
TL;DR
Skew is the asymmetry between put and call IV at equal OTM distance. Steep = crash fear priced in. Flat = complacency. Extremes mark regime shifts.
- What it measures
- Difference in IV between the put wing (e.g. 25-delta put) and the call wing (e.g. 25-delta call).
- What it signals
- How much traders are paying for downside protection relative to upside participation.
- Why we measure it
- Skew is a direct read on fear vs greed in the options market. It leads realised moves more often than it lags.
- Who uses it
- Vol traders, macro traders, contrarian investors, tail-risk hedgers.
How to read Volatility Skew
Very steep skew
- Deep fear priced in
- Often marks local bottoms
- Contrarian long setups
- Put overpricing = short-put edge
Good for: contrarian longs, short-put spreads
Very flat / inverted skew
- Complacency dominates
- Often precedes sharp selloffs
- Protection is cheap — buy it
- Bear warning sign
Bad for: short downside — good for: put buyers
Normal equity skew
- Typical index skew slope
- No edge in shape
- Trade on other factors
- Default reading
Baseline
Rules of thumb
- Equity skew is always negative. Puts are always richer than equidistant calls. Magnitude matters, not sign.
- Compare across names. Single-stock skew is usually flatter than index skew. Don't compare directly.
- Pair with term structure. Steep front skew + backwardation = stress regime. Flat skew + contango = complacency.
- Watch extremes historically. Skew percentile rank matters more than absolute level.
- Event days steepen skew. Earnings and CPI steepen skew temporarily; back it out of your signal.
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