Skew Steepness, in crypto institutional options trading, quantifies the rate at which implied volatility changes across different strike prices for options with the same expiry date. It measures the gradient of the implied volatility surface, indicating the market’s perception of the probability of extreme price movements in the underlying crypto asset. A steeper skew suggests heightened demand for out-of-the-money options.
Mechanism
This metric is derived by observing the implied volatilities of various call and put options for a given cryptocurrency, plotting them against their respective strike prices, and calculating the slope of this curve. For instance, a steep negative skew indicates that out-of-the-money put options have significantly higher implied volatility than out-of-the-money call options, reflecting demand for downside protection.
Methodology
Institutional traders utilize skew steepness to gauge market sentiment regarding potential tail risks and to formulate complex options strategies, such as straddles or spreads. It assists in pricing exotic options and managing portfolio delta and gamma risks. Analyzing changes in skew steepness helps predict future market movements, informing hedging decisions and opportunistic trading in crypto derivatives.
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