What is Skewness?
Skewness is a measure of the symmetry/asymmetry of the frequency distribution of a random variable (like price). Skew is also the correlation between Implied Volatility and Direction.
Most retail traders assume that because probability appears as a graph in your trading platform as an equally shaped cone that the distribution is "Normal". Not so.
How do you check that the underlying has a Positive, Negative or Dual Skew?
Open up the options chain. Then, compare from the lower strike price to the higher strike price what the readings on the Implied Volatility for Calls and Puts are. Here's the relationship:
Why must you be aware of what the Skew does to the pricing of Calls and Puts?
You always want to be in position to
❑ Sell the strike with the Higher IV and buy the strike with the Lower IV and not the reverse. Be on the correct side of where the Skew makes IV rise to or fall from.
❑ Buy Calls or Puts when they are not in demand, to profit as their prices rise.
❑ Sell Calls or Puts when they are in demand, to profit as their prices fall.
❑ Mode is the most frequently occurring number (happens the most often) by a random variable – such as price – within a given Standard Deviation.