Volatility Skew in trading refers to the non-uniform distribution of implied volatility across different option strikes for a given underlying asset. The skew is used to describe the shape of the volatility smile, which is a graph plotting the implied volatility of options with varying strikes.There are two types of skews: reverse and forward skews. A reverse skew occurs when the implied volatility of out-of-the-money options (options that are more likely to expire worthless) is higher than the implied volatility of at-the-money or in-the-money options (options that are more likely to have intrinsic value at expiration).A forward skew, on the other hand, is when the implied volatility of out-of-the-money options is lower than the implied volatility of at-the-money or in-the-money options.Both skews can be influenced by various factors, including market expectations for future price movements, changes in interest rates, and supply and demand dynamics for options contracts. Traders often use skew information to inform their option trading strategies, such as volatility trading or risk management.Volatility skew is the difference in implied volatility between different options on the same underlying asset.For example, a call option with a strike price of $50 will typically have a higher implied volatility than a call option with a strike price of $100. This is because there is more uncertainty surrounding the lower strike price, which makes it more risky for investors.However, just because an option has a higher implied volatility does not mean that it will always be more expensive. In fact, sometimes options with high implied volatilities can be cheaper than those with low implied volatilities. This phenomenon is known as "reverse skew" and it occurs when there is more demand for high-strike options than for low-strike options.
