# What are some heurestics you could use to judge if skew is cheap or expensive? If any?

Are there rules of thumbs/models that you could use to develop intuition for when skew is cheap or expensive? From what I gather, volatility is a number that is backed out of price in a sense, "the wrong number to get the right answer". But then someone has to set the price, they have a sense of what the correct "skew" is, and I'm trying to understand some intuitive way of understanding.

If for instance in a 100 stock ATM vol is trading at 35, and the stock has historically moved at 30 vol, you can have some sense that 35 is expensive. However, if the 80 strike was quoted at 35 volatility, is that cheap or expensive? How would one go about trying to answer this question?

How did traders use to price skew before we had complicated models that went beyond B/S?

• I think this is up to experience basically. There isn't a model which is going to tell you whether skew is cheap/expensive, because skew is an empirical phenomenon caused by supply/demand dynamics of options. There are even asset classes for which there's a skew instead of a smile, there is no much theoretical justification for that really. Best thing is to investigate historical data on vol curves to get an intuition, and going forward maybe check daily, weekly how the curve has evolved to get a feel as @noob2 suggest. Apr 13, 2020 at 14:04
• @DaneelOlivaw yeah, that makes sense. I'm just trying to figure out a way to make skew "real". You can trade realized vs IV in a relatively simple way following simple rules, trading "skew" which you implicitly are anytime you trade a non ATM option so it's just confusing af. The only thing I can really think of are just the hard arbitrage limits but those are so wide as to be almost meaningless Apr 13, 2020 at 20:59
• There are some common measures you can use, check Wikipedia. Apr 13, 2020 at 21:20
• @DaneelOlivaw thanks, I'll check those out. It seems local volatility is probably the "right" answer in a way to what I'm looking for, thanks Apr 14, 2020 at 0:57