What does "volatility skew" indicate?

Volatility skew indicates the pattern of implied volatility across different strike prices for options. In the options market, implied volatility is often not uniform across all strikes. Instead, it can vary significantly, resulting in a voluntary skew. This skew can reveal market participants' expectations about potential price movements in the underlying asset.

For instance, a typical volatility skew might show that out-of-the-money put options have higher implied volatility compared to out-of-the-money call options. This could indicate a market expectation of downside risks or increased uncertainty concerning the asset’s future price. Analyzing the volatility skew helps traders make more informed decisions about pricing, risk assessment, and hedging strategies.

The other options do not accurately define volatility skew. The relationship between strike prices and expiration dates speaks to different aspects of options pricing and time value but does not directly relate to volatility. The number of open positions in the market pertains more to market liquidity and activity rather than pricing dynamics. Time until expiration focuses on options time value and does not capture the nuances of how implied volatility behaves across strike prices.