What Is Volatility Skew?
Volatility skew measures the difference in implied volatility between out-of-the-money puts and calls at the same delta (e.g., 25-delta put IV minus 25-delta call IV). A positive skew means puts are priced higher than calls, reflecting greater demand for downside protection. A negative skew means calls are priced higher, reflecting demand for upside exposure.
How Volatility Skew Works
In crypto, the 25-delta risk reversal (call IV minus put IV) is the standard measure of skew. When the risk reversal is deeply negative, the market is paying up for put protection — a sign of bearish sentiment or hedging activity. When positive, call demand dominates — typically during FOMO-driven rallies where traders use calls for leveraged upside.
Why It Matters for Traders
Skew is a leading indicator of institutional sentiment because it reflects where sophisticated capital is positioning in the options market. Extreme negative skew (heavy put demand) near a potential bottom can signal that maximum fear is priced in — a contrarian buy signal. Monitoring skew changes alongside spot price and funding rates provides a multi-dimensional view of market positioning.
