Direct Answer
Call skew compares implied volatility on out-of-the-money calls with a reference level, usually at-the-money volatility, for one expiry. It shows how richly the market prices upside strikes relative to the center of the smile. A positive value means upside strikes are priced at higher implied volatility than the center, which is more typical of commodities and some single stocks than of equity indexes.
Call Skew: Formula, Meaning, Signals, Examples and How to Use It
How Is Call Skew Calculated?
Call skew compares implied volatility on out-of-the-money calls with a reference level, usually at-the-money volatility, for one expiry. It shows how richly the market prices upside strikes relative to the center of the smile.
Formula: call skew = IV_OTM call (for example 25-delta) - IV_ATM
Inputs:
- Implied volatility of an out-of-the-money call at a fixed delta or moneyness
- At-the-money implied volatility
- A single expiry
Worked example. With a 25-delta call at 24% and at-the-money volatility of 20%, call skew is 4.0% in volatility points. The inputs are illustrative numbers, not market data.
Reading it. A positive value means upside strikes are priced at higher implied volatility than the center, which is more typical of commodities and some single stocks than of equity indexes. A value near zero or negative means the upside is priced flat or cheap.
Limits. There is no single definition: some sources use a ratio, others use a different delta or compare with put-side volatility. It reflects option pricing and demand for calls, not a forecast of an upward move.
What is Call Skew?
Call skew compares implied volatility on out-of-the-money calls with a reference level, usually at-the-money volatility, for one expiry. It shows how richly the market prices upside strikes relative to the center of the smile.
How to use Call Skew
A positive value means upside strikes are priced at higher implied volatility than the center, which is more typical of commodities and some single stocks than of equity indexes. A value near zero or negative means the upside is priced flat or cheap. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime.
Strengths
- Subtracting at-the-money volatility isolates the premium or discount attached to upside strikes, with the overall volatility level netted out.
- Reading it at a fixed delta lets the same measure be followed through time even as the underlying's price moves.
- Reproducible when the formula and data convention are fixed.
Weaknesses and limitations
- It covers only the call wing, so comparing it with put-side pricing requires a second figure built with matching conventions.
- In markets where put demand drives the smile the call wing is comparatively flat, so the difference can be small relative to quote noise.
- Correlated indicators can create false confidence by repeating the same underlying information.
Editorial and risk note
This page is educational content, not individualized investment advice. It should not imply guaranteed prediction, accuracy or outperformance.
Frequently Asked Questions
Is Call Skew a buy or sell signal?
No. A positive value means upside strikes are priced at higher implied volatility than the center, which is more typical of commodities and some single stocks than of equity indexes. There is no single definition: some sources use a ratio, others use a different delta or compare with put-side volatility. A trade built on it still needs a trigger, an invalidation rule, a position size and realistic execution assumptions.
What is the best setting for Call Skew?
Call Skew is computed from implied volatility of an out-of-the-money call at a fixed delta or moneyness; at-the-money implied volatility; a single expiry, so the choices that matter are the data convention and the window it is read over. Test those across instruments, regimes and out-of-sample periods instead of fitting one historical winner.
Can Call Skew be used by itself?
There is no single definition: some sources use a ratio, others use a different delta or compare with put-side volatility. It reflects option pricing and demand for calls, not a forecast of an upward move. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone.
Does Call Skew work on every timeframe?
The calculation (call skew = IV_OTM call (for example 25-delta) - IV_ATM) can be run on any bar size, but behavior is not portable: a reading on a five-minute chart describes a very different market window from the same reading on a daily chart. Validate the exact timeframe before relying on it.
Why does Call Skew give false signals?
It covers only the call wing, so comparing it with put-side pricing requires a second figure built with matching conventions. In markets where put demand drives the smile the call wing is comparatively flat, so the difference can be small relative to quote noise. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated.
How should Call Skew be backtested?
Rebuild Call Skew from implied volatility of an out-of-the-money call at a fixed delta or moneyness using point-in-time data, write the rules before testing, include delisted securities where relevant, model realistic fills and costs, reserve a validation sample and compare with a simpler baseline.