Call Skew
BLUF: Volbox.com is an options data visualization platform. We generate a 3D implied volatility (IV) surface to help options traders see which options are “cheap” and “expensive,” in volatility terms, as compared to others. We also provide 2D volatility “smiles” for each expiration, and 2D “term structure” for each strike.
Example: GameStop (GME). The GME options implied volatility surface has what options traders describe as “call skew” through the “term structure.”
Call skew in Gamestop Corporation (GME)
View from the near term options expiration.
In other words, out-of-the-money (OTM) calls have higher implied volatility than OTM puts, not just for contracts that expire soon, but all the way into the future.
This is unusual. Most options IV surfaces exhibit put skew, however minor, for all expirations.
Here is another angle of the same surface using the Volbox.com software:
Call skew in Gamestop Corporation (GME)
View from the far term options expiration
What is going on with GME? Below is a brief explanation.
The IV surface shows the volatility implied by the market price of an option contract.
The IV surface is made of two parts: OTM calls to the right and OTM puts to the left.
The normal structure of the options implied volatility surfaces
Source: Investopedia
In a normal Black-Scholes world, the surface should be flat, but options traders know that different strikes and expirations reflect a different volatility expectation.
There are several ways to view the height of the IV surface at any given contract/point.
1) IV height reflects demand. That is, higher IV reflects a more “expensive” options price, in volatility terms.
The “IV as demand” explanation is reflected in the negative skew of most IV surfaces, meaning that options traders buy puts as insurance against downward moves in stock prices.
2) IV height reflects volatility expectations. That is, higher IV reflects the market expectations for more volatility around a given date.
Higher volatility expectations require options market makers (OMMs) to raise prices as compensation for risk of being on the “wrong” side of the trade.
This explains why, in the normal put skew story, puts are more expensive as compensation to OMMs for taking the risk of selling “insurance”.
Note, these explanations are not mutually exclusive. IV always reflects some combination of options demand, future volatility expectations, and compensation for risk for the options seller.
What does this mean for the unusual call skew in GameStop?
1) OTM calls are in high demand.
2) Options market makers (OMMs) are not willing to sell calls (and be short the common stock) without compensation for risk in the case of another meme stock “gamma squeeze.” Thus, they raise the prices of the calls.
Either way, the result is call skew through the IV term structure for GameStop (GME).
Call skew in the 18 Oct 2024 options contract for GME
You can see this in both the October 2024 expirations as well as the January 2025 expirations for GameStop (GME).
Call skew in the 17 Jan 2025 options contract for GME
Note that the call skew is not unique to so-called “meme stocks”!
Here is call skew in the options implied volatility surface for iShares Silver Trust (SLV):
Call skew in the options IV surface for iShares Silver Trust (SLV).
Volbox offers options traders a critical tool for visualizing the “price per square foot” of options in volatility terms.
With our powerful software, you can view and compare the implied volatility of any option contract in an instant.
Volbox is also unique to offer bid/ask quotes on the 2D IV smile at every options expiration date.
See for yourself at Volbox.com, where your first month is free!