What Volatility Skew Reveals About Risk and Option Demand

Summary

The document raises a conceptual question about volatility skew: options at different strikes imply different volatilities, even though implied volatility is often treated as a measure of expected future risk. It asks whether those differences represent separate investor forecasts of risk or disagreement about the underlying’s future volatility.

It presents the question without an answer, supporting evidence, or a proposed method. The useful starting point is to distinguish strike-specific implied volatility from a direct forecast of realized risk: option prices also reflect the shape of the risk-neutral distribution, supply and demand, and the pricing of downside or upside exposure. The document does not develop these distinctions, so it serves as a prompt for further study rather than a conclusion about what skew means.

Key ideas

• Implied volatility varies across option strikes, creating a volatility skew.
• The document asks whether strike-specific implied volatilities reflect different expectations of future risk.
• It also raises the possibility that the skew reflects disagreement among investors.
• The document offers no answer or evidence, so its questions require further analysis.

Tags

# What is the informational content of the volatility skew?


# What is the informational content of the volatility skew?












The option-implied volatility is well-known as a measure for the risk-neutral future expected risk for the underlying asset. However, the market prices of options (across different strikes) imply different volatilities such that we form a volatility skew.

Doesn't this mean that the aggregated investor demand and supply per option price (of different strikes) show a different future expected risk? Is it reasonable to say that each point on the volatility skew represent different estimates of future expected risk and that there is disagreement amongst investors as to what is the "correct" future expected risk?

I am not only looking for an answer to my questions, open opinions and redirections to relevant concepts/sources are very welcome.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.