What is this?
"The Volatility Skew" visualizes market implied volatilities for option contracts across strikes and maturities. Construct graphs for actively traded option contracts and combine them to suit your needs:
- Varying maturities
- Different underliers
- Bid / ask / last implied volatility curves
Compare an underlier's term structure by selecting different option maturities for the same stock. For example, compare AAPL volatility in December against the April contract.
Visualize the volatility skew between two different stocks of the same maturity; for example, compare Dec. AAPL vs. Dec. MSFT. Strikes (x-axis) are mapped to percentage distance from the at-the-money when comparing among different underliers.
Toggle between bid, offer, and last-traded volatility curves. Identify relationships among strikes and even hone in on areas to watch for possible mis-pricings.
This project was created out of curiosity and for fun, given the absence of a similarly quick/free resource on the interwebs.
. . . I don't get it.
Volatility is one of the primary inputs that determine the price of an option. Traders typically maintain a volatility surface that maps volatilities across strikes (skew / smile) and maturities (term structure.) These relationships help identify potential option mis-pricings and arbitrage opportunities. In essence, buying volatility low, selling it high, while trading gamma are approaches used to lock in "edge" and (hopefully) profit.
. . . Tell me more.
The Volatility Skew is just a casual tool. The resources below are good starting points on volatility trading and general option theory. Nattenberg, in particular, is worthwhile, accessible, and essential reading.