Implied volatility curves plot the option ‘skew’ by displaying the implied volatility value at each delta level or of either the maturity or expiration. Different curve shapes like smile, smirk (reverse skew) and forward skew can be good indicators of market sentiment in terms of option volatility demand. Additional layers of analysis can applied by adding the multiple maturity types or multiple expirations and viewing the curve historically versus the current levels.
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Once all selections have been made, click insert and view the volatility curve by expiration chart. Implied volatility is plotted on the y-axis and the delta values are plotted along the x-axis.
In the image below, the USO 7/29/2022 is exhibiting a 'forward curve' or inverse skew where call deltas are pricing in higher volatility levels than puts. This structure is more common for commodity markets, as upside protection can trade at higher premiums than downside puts when events like supply disruptions can drive the underlying commodity price higher.
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Volatility Forecasting
Visually plotting the implied volatility curves, or skew, can enable the trader or investor to better view areas of high and low volatility and then take action depending on the strategy or current position. Once the areas with the highest and lowest market risk are plotted (highest IV levels and lowest IV levels respectively), that is where you can search for potential opportunity. If a position has been taken in one contract that is nearing expiration and the trader is looking to roll it to the next expiration, they can look to the skew of the new expiration and pick the option that best fits their needs. Most non-commodity based stocks or ETFs tend to exhibit reveres skew. If an investor is bullish on the underlying they can look to trade a short put, short put spread or long combo to take advantage of the inflated delta IV levels. If the underlying is exhibiting inverse skew, investors can look to sell covered calls, call spreads or short combos using strikes that have high premium levels due to concern of a ‘melt up’.