Volitility Skew is Standard Way of Making Money in Options
At certain times an option can become more ‘expensive’ relative to another option that’s trading in the same
stock but with a different exercise price. This presents an opportunity to gain a ‘trading edge’ by buying the
more fairly priced option and selling the more ‘expensive’ option.
How can you tell if options are overpriced compared to other options?
The answer is by using implied volatility as a measure to compare different options - high implied volatility
= higher option prices. Therefore, if one option has a significantly higher implied volatility than another, it
means it is ‘relatively’ more ‘expensive’ than the other option. When this situation occurs it is called a
volatility skew.
Trading Tip
If there is a significant difference between the implied volatility of two similar options, then sell the
overpriced option and buy the more fairly priced option. This helps to tilt the odds more in your favour,
giving you a trading edge.
Next
At certain times an option can become more ‘expensive’ relative to another option that’s trading in the same
stock but with a different exercise price. This presents an opportunity to gain a ‘trading edge’ by buying the
more fairly priced option and selling the more ‘expensive’ option.
How can you tell if options are overpriced compared to other options?
The answer is by using implied volatility as a measure to compare different options - high implied volatility
= higher option prices. Therefore, if one option has a significantly higher implied volatility than another, it
means it is ‘relatively’ more ‘expensive’ than the other option. When this situation occurs it is called a
volatility skew.
Trading Tip
If there is a significant difference between the implied volatility of two similar options, then sell the
overpriced option and buy the more fairly priced option. This helps to tilt the odds more in your favour,
giving you a trading edge.
Next
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