Skew through time

Skew through time? 

 

The skew for any specific stock is steeper for ST maturities than for LT maturities. 

 

To understand this,  remember that skew is mainly there because traders are afraid to lose money on downside strikes in case the market goes down and becomes more volatile. 

Obviously, the larger the gamma the more imminent the problem!

Since ST downside options have larger gammas when the stock price moves down to the lower strikes, the effect of skew is largest for ST options. 

 

Another reason is that for ST maturities the trader exactly knows wheter an option is a downside option or not. 

For LT options, trader cannot qualify whether it is a downside strike, as the trader does not know where the stock will be trading in X year time. 

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