Options skew refers to the difference in implied volatility (IV) across various strike prices or expiration dates for options on the same underlying asset. It reflects the market’s perception of risk and the demand for specific options, often indicating how traders anticipate potential price movements. Typically, skew arises because out-of-the-money (OTM) options — puts or calls — can exhibit higher or lower implied volatility than at-the-money (ATM) options, depending on market conditions and sentiment. When the implied volatility for out-of-the-money (OTM) calls exceeds that of OTM puts, it is referred to as “positive skew” or “call skew.” This signifies that the market anticipates a higher probability of substantial upward movement in the underlying asset or that volatility is likely to increase as the underlying price rises. It is typical for assets where significant upward movements are expected or can occur during extreme market stress, such as commodities facing short-term supply shortages or demand surges like natural gas or electricity. This phenomenon is also observed in growth stocks. When implied volatility is higher for out-of-the-money (OTM) puts than for OTM calls — a common occurrence for most stocks and stock indices — it may suggest that investors are buying puts for downside protection and/or selling upside calls to collect option premiums or that investors expect the volatility of the underlying asset to rise as the price falls, or, when looking at an index that additionally correlations may increase, which can contribute to higher volatility of an index relative to the volatility of the constituents of it. This phenomenon is known as “negative” or “put skew.” Implied volatility skew often leads to a situation where, if an investor is interested in employing vertical spreads, the relative attractiveness of the risk-reward could appear quite asymmetric. For example, if someone considers buying a call spread in SPDR S & P 500 Trust (SPY) for a bullish bet, the risk/reward relationship may seem less appealing than purchasing a put spread. Consider the following two examples. SPY closed at $568.59 on Wednesday. If an individual is inclined to bet that it might fall 5% within the next 30 days, they could buy a May 30th expiration 568/540 put spread for approximately $7.15, just over 25% of the difference between the strikes. SPY YTD mountain SPDR S & P 500 ETF Trust, YTD The potential payoff of nearly $21 is almost three times the price of acquiring it. The peak profit ratio would be roughly 3:1. The May 30 569/597 call spread costs about $13.35, or nearly 48% of the difference between the strikes. The maximum reward of $14.65 is only 10% higher than the cost of buying the spread. The peak profit ratio here is merely 1.1:1. Thus, the payoff for a 5% decline over approximately one month is more attractive than a 5% increase. While it is true that the market rises more often than it falls over any 30 days, this fact offers little consolation when the difference in risk-reward is so significant. Another way to observe the asymmetry is to consider an “in-the-money” call spread with no extrinsic premium. This refers to a call spread where the in-the-money call has the same extrinsic value as the out-of-the-money call. Using May 30th options, an example would be the 500/590 call spread. Both options have between $6 and $7 of “extrinsic” value. This trade involves over $68 of downside risk and only $21.40 in potential upside. Even though the market tends to rise more often than it falls, and a 12% decline in just over a month is unusual, most investors would not find such terms attractive. Sometimes, however, this can work in an investor’s favor. Take Bitcoin or its ETF proxy, IBIT , for instance. Bitcoin has fallen over 11% year-to-date, but options might provide a way to make a bullish bet with favorable risk and reward. IBIT YTD mountain iShares Bitcoin Trust ETF For example, a trader could buy a June 42/60 call spread for $7.57. That spread is $7.18 “in the money” (the current price of $49.18 minus the $42 strike). Therefore, there is very little decay. The maximum possible loss is $7.57, while the maximum potential gain is $10.82. Incidentally, I chose the $60 strike first because that is close to the all-time high. Like many securities, I imagine it may encounter some resistance at a prior high even if it does eventually break through it. The moral of the story is this: If options exhibit a lot of “put skew” (negative skewness), put spreads may offer better risk/reward. If “call skew” (positive skewness) is elevated, call spreads may be the way to go. Get Your Ticket to Pro LIVE Join us at the New York Stock Exchange! Uncertain markets? Gain an edge with CNBC Pro LIVE , an exclusive, inaugural event at the historic New York Stock Exchange. In today’s dynamic financial landscape, access to expert insights is paramount. As a CNBC Pro subscriber, we invite you to join us for our first exclusive, in-person CNBC Pro LIVE event at the iconic NYSE on Thursday, June 12. Join interactive Pro clinics led by our Pros Carter Worth, Dan Niles, and Dan Ives, with a special edition of Pro Talks with Tom Lee. You’ll also get the opportunity to network with CNBC experts, talent and other Pro subscribers during an exciting cocktail hour on the legendary trading floor. Tickets are limited! 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