Here we will check a guide on how to leverage option chain skew for profitable trades. Now, let us check What is the option chain skew? Option chain skew is a term used to describe the difference in implied volatility between call and put options with the same strike price and expiration date. For example, if the implied volatility of a call option is 20% and the implied volatility of a put option is 15%, the option chain is said to be skewed to the call side.
Why is option chain skew important?
Option chain skew can be important for traders because it can provide insights into the market’s expectations for the underlying security. For example, if the option chain is skewed to the call side, this suggests that the market is expecting the underlying security to move up.
How to leverage option chain skew for profitable trades?
There are a few ways to leverage option chain skew for profitable trades:
Buying Option Chains with high implied volatility: If the option chain is skewed to the call side, this suggests that the market is expecting the underlying security to move up. Therefore, you could buy call options with high implied volatility to profit from this movement.
Selling options with low implied volatility: If the option chain is skewed to the put side, this suggests that the market is expecting the underlying security to move down. Therefore, you could sell put options with low implied volatility to profit from this movement.
Using spreads: You could also use spreads to take advantage of option chain skew. For example, you could buy a call option with high implied volatility and sell a put option with low implied volatility. This would create a bullish spread, which would profit if the underlying security moves up.
There are many different sources of option chain data. It is a good idea to use a variety of sources to get a more complete picture of the market. The news can also affect option chain skew. For example, if there is a major news event that could cause the underlying security to move significantly, you may want to consider adjusting your trading strategy accordingly. It takes time to master option chain skew. Don’t expect to be an expert overnight. Just keep learning and practicing, and you will eventually get the hang of it. By following these tips, you can increase your chances of leveraging option chain skew for profitable trades and making informed trading decisions.
Conclusion
Option chain skew can be a valuable tool for traders who are looking to make profitable trades. By understanding how to interpret option chain skew, you can increase your chances of success in the options market. In the end, whether a trader chooses to trade option chains or single option contracts depends on their trading strategy, risk management plan, and overall goals. By weighing the pros and cons of each and knowing which type of contract is best suited for their needs, traders can make better-informed trading decisions and potentially increase their chances of success in options trading.
