What might explain the volatility skew that is observed in many equity markets?

In the equity markets, a volatility skew occurs because money managers usually prefer to write calls over puts. The volatility skew is represented graphically to demonstrate the IV of a particular set of options.

Why is VIX higher than implied volatility?

In fact, there are even financial contracts which track implied volatility. The Volatility Index (VIX) is a futures contract on the Chicago Board of Options Exchange (CBOE) that shows expectations for the 30-day volatility. VIX goes up during downturns in the market and represents higher volatility in the marketplace.

Is higher implied volatility better for options?

Options that have high levels of implied volatility will result in high-priced option premiums. Conversely, as the market’s expectations decrease, or demand for an option diminishes, implied volatility will decrease. Options containing lower levels of implied volatility will result in cheaper option prices.

How do you interpret the implied volatility of a surface?

The volatility surface is a three-dimensional plot where the x-axis is the time to maturity, the z-axis is the strike price, and the y-axis is the implied volatility. If the Black-Scholes model were completely correct, then the implied volatility surface across strike prices and time to maturity should be flat.

What is equity skew?

Equity skew, which at its most basic purports to measure the difference in the value of stock options with different strike prices, is one of the most used (and abused) sentiment measures in the equity options market.

What is VIX skew?

Understanding the SKEW Index The primary difference between the VIX and the SKEW is that the VIX is based upon implied volatility round the at-the-money (ATM) strike price while the SKEW considers implied volatility of out-of-the-money (OTM) strikes. The index increases general market awareness among investors.