Volatility & advanced strategies
What is Skew Trading and how do options funds capture mispriced premiums between calls and puts?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
Skew trading exploits mispricing in the volatility skew, the pattern where out-of-the-money puts carry higher implied volatility than equidistant calls, by constructing spreads like risk reversals that profit as skew normalizes.
How it works
Traders compare current skew steepness to historical norms and sell relatively overpriced puts while buying relatively cheap calls (or vice versa) when skew appears stretched relative to fundamentals.
An example
A trader selling a rich 25-delta put and buying a cheaper 25-delta call on the same expiration constructs a risk reversal betting that put skew will compress.
Risk & limitations
Skew reflects genuine crash-risk demand and can persist or steepen further during stress, so skew trades can suffer large losses if volatility regimes shift unexpectedly.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.