Skew term structure in crypto options refers to the relationship between the implied volatility skew for a given underlying asset and different expiration dates. It describes how the implied volatility of out-of-the-money and in-the-money options varies across various maturities. This structure provides critical insights into market participants’ expectations regarding future price movements and potential tail risks over different time horizons.
Mechanism
The term structure of skew is derived by plotting the implied volatility of options with the same underlying asset and strike price, but different expiration dates. Specifically, it analyzes how the “smile” or “smirk” of implied volatility (i.e., higher implied volatility for options further out of the money) changes as options approach or recede from expiration. Data from options exchanges, fed into pricing models, generates these implied volatilities, which are then analyzed for their shape and evolution over time.
Methodology
The methodology involves interpreting the skew term structure as a forward-looking indicator of market sentiment and risk perception. A steep positive skew for longer maturities might suggest heightened concerns about future downside risk, while a flattening curve could indicate reduced uncertainty. Institutional traders use this information to construct complex options strategies, hedge portfolio gamma and vega exposures across different timeframes, and gauge the market’s assessment of future asset volatility and potential large price swings.
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