Reading the market
Volatility skew: when the market is paying you to take the unpopular side
When puts are pricier than calls, the market is paying for protection. When calls are pricier than puts, it is chasing a squeeze. Both situations have specific trades.
Most retail content treats skew as advanced. It is not. Skew is just the difference in between out-of-the-money puts and out-of-the-money calls of similar delta. When puts cost more, you have positive put skew. When calls cost more, you have positive call skew (also called "reverse skew" or "forward skew" depending on who is talking).
Why skew exists
Most stocks have positive put skew most of the time, because most equity portfolios are long. Long holders buy puts to protect. Hedgers willing to pay up for downside protection lift put IV relative to call IV.
When skew gets unusually steep, it means hedgers are paying even more than usual. That can be a good time to be on the other side: a short put or a put credit spread when the market is overpaying for protection.
The opposite case
Sometimes calls trade richer than puts. This usually happens in names being squeezed (think GameStop in 2021) or names with takeover speculation. The market is paying for upside lottery tickets. The calm side of that trade is to sell the calls (with a defined-risk wing above) when the skew is most extreme.
How the scanner uses skew
- The skew scanner flags names where put-skew is in the top decile of its 1-year range. These names get put-credit-spread suggestions.
- Names with extreme call skew get bear-call-spread suggestions.
- Skew alone is not a trade thesis. Combine with IV rank and a chart read.
What to do next
Open the scanner's skew section. Look at the top three flagged names. For each one, ask yourself: would I want to own this stock at the put strike if assigned? If yes, the put-credit-spread is worth a closer look. If no, skip and find a name you would own.