Volatility Skew
– situation where individual options on a particular entity have different implied volatilities that form a pattern
– the pattern can be a positive or negative skew
Positive Skew (forward skew)
– higher strikes, higher IV
Negative Skew (reverse skew)
– lower strikes, higher IV
Horizontal Skew
– long term options with lower IV
– because longer term options have uncertainty of future news
If skew is (+) and IV is Low Percentile –> Put Backspread
If skew is (+) and IV is High Percentile –> Call Ratio Spread
If skew is (-) and IV is Low Percentile –> Call Backspread
If skew is (-) and IV is High Percentile –> Put Ratio Backspread
Credits: https://www.optionstrategist.com/blog/2013/03/volatility-skew-information