The markets have been extremely volatile this year, so we decided to review how option prices tend to change with implied volatility (IV).

When the markets become more volatile, the demand for options increases. In particular, there is more demand for put options than call options, creating a downside skew. The Skinny Around Skew, an episode of The Skinny on Options Data Science on January 28, 2016 explained how and why put options are generally more expensive than calls.

Today's segment examined this in a more specific light. One standard deviation put and call prices in SPY were displayed. The point of this first table was to demonstrate how put options generally trade at a premium to call options.

Another table was shown that examined the prices of one standard deviation put and calls after a 4% increase in IV. Options with the same amount of days to expiration were chosen to isolate the IV impact. With an increase in IV, we observed a greater increase in the put premium relative to the call premium. This demonstrates that the downside skew increased with an increase in IV.

The final table displayed the same metrics, but for a decrease in IV. In this example, we examined a decrease in the put premium that was larger than the decrease in the call premium. In other words, the skew had flattened.

Watch this segment of “Options Jive” with Tom Sosnoff and Tony Battista for the valuable takeaways and a better understanding of volatility's impact on option skew.