6. Options and the volatility desk

The volatility surface and skew (OVDV)

Implied volatility changes with the strike (the skew) and with the expiry (the term structure), and OVDV fits the whole surface from option quotes.

  • 4 min
  • 3 questions
  • Lesson 1 of 4

Why you would care

"NVDA vol is 30%." Which one? Short-dated puts may be at 40%, one-year calls at 28%. Traders talk about the shape, not a single level. The shape tells a story: fear of a crash, an event on a date, a market that expects calm to return.

The idea from scratch

Across strikes: smile and skew

Take one expiry and plot implied volatility against strike. For stocks and indices the curve usually slopes down to the right: low-strike puts are more expensive in volatility terms than high-strike calls. That tilt is the skew (or "smirk").

Why: investors buy puts as crash insurance, and crashes are faster than rallies. Insurance costs extra.

Gloom screenshot: Two smile shapes, illustrative
Two smile shapes, illustrative: the stock-index smirk (puts cost more) and a symmetric smile seen in some currencies.

A common way to measure skew: the 25-delta skew = implied vol of the 25-delta put minus implied vol of the 25-delta call (both about equally far out of the money).

Across expiries: term structure

Plot at-the-money IV against expiry. Usually it rises with time in calm markets (more can happen over a year). Before an event (earnings) the expiry just after it jumps up. In a panic, short-dated vol shoots above long-dated vol (the curve inverts).

The surface

Both together: strike (or delta) on one axis, expiry on another, IV as height. Gloom fits a smooth surface through the quotes so you can read any point.

Diagram: Option quotes: all strikes, all expiries leads to Clean quotes, find the forward; Clean quotes, find the forward leads to Fit a smooth smile per expiry; Fit a smooth smile per expiry leads to Surface: IV by delta and expiry; Surface: IV by delta and expiry leads to Skew: 25d put minus 25d call; Surface: IV by delta and expiry leads to Term structure: ATM IV by expiry.

See it in Gloom

Gloom screenshot: OVDV NVDA, 3D surface
OVDV NVDA, 3D surface: implied vol by delta (10-delta put to 10-delta call) and expiry (1 week to 18 months), with the at-the-money line highlighted. Historical example.

open ittype OVDV NVDA. Tabs: 3D surface, Table, Smile, Term, Skew, Forwards. Keys: v view, c chain, m more expiries, t stored dates (the surface as of a past close).

  1. IV30 30.7% 09-25 close: the 30-day at-the-money IV at the last close.
  2. IV rank 0, IV pctl 0: implied vol at the very bottom of its past year.
  3. The highlighted ATM line: IV rises from about 30% at 1 week to about 40% at 18 months. Upward term structure: calm now, more uncertainty priced further out.
  4. The left edge (toward 10P, low-strike puts): higher than the right edge (10C): the skew.
  5. The marked point 30.3%: the selected expiry's at-the-money IV.

Practice and recap

Try it3 tasks
  1. In the screenshot, is short-dated or long-dated vol higher? (Long-dated: about 40% vs 30%.)
  2. 25-delta put IV 34%, 25-delta call IV 29%. 25-delta skew? (+5 points.)
  3. Earnings are in 3 weeks. Which expiry on the Term tab do you expect to stick out? (The first one after the report date.)
Common mistakes4 mistakes
  • Quoting "the" IV without strike and expiry.
  • Reading skew as a forecast of a fall. It is the price of protection.
  • Comparing smiles across stocks without normalizing by delta or moneyness.
  • Ignoring events inside an expiry.
Check yourself3 questions
  1. What is the skew?
  2. What does an inverted term structure suggest?
  3. Why are low-strike puts usually priced at higher IV?
Answers
  1. How implied vol changes across strikes for one expiry; for stocks, puts are usually richer than calls.
  2. Stress now: short-dated options price more movement than long-dated ones.
  3. Investors buy them as crash insurance, and markets fall faster than they rise.
Words in this lesson6 words
volatility surface
Implied vol by strike (or delta) and expiry.
smile / skew
IV across strikes; skew is its tilt.
25-delta skew
IV of the 25-delta put minus IV of the 25-delta call.
term structure
At-the-money IV across expiries.
inverted (backwardated) term structure
Short-dated IV above long-dated IV.
moneyness
How far a strike is from the current price, often as a %.

Educational material about reading market data, not investment advice.