The Skew · Components
Free to readLevel, Slope & Curvature: The Three Pieces of Skew
One IV curve, three independent stories. Learn to read each piece — and which Nations index it drives.
The skew curve plots implied volatility against strike (or log-moneyness — puts on the left, calls on the right). The deconstruction fits that curve and pulls out three orthogonal numbers. Here's what each one looks like, what moves it, and what it means for your trade.
Skew deconstructed into three independent shapes — the curve’s height (Level), its tilt (Slope), and its smile (Curvature). Each moves for different reasons.
Level
The overall height of the curve — OI-weighted average IV across strikes. The "parallel shift," and the biggest driver of skew change over time. Rises when fear rises.
Level is the height of the IV curve. When fear rises, the entire curve shifts up in parallel — that’s a Level move.
Slope
The linear tilt — IV per unit of log-moneyness. Almost always negative in equities (puts richer than calls). Flattens in rallies, steepens under stress.
Slope is the tilt. The more negative the Slope, the steeper the put-skew — puts richer than calls. It flattens in rallies, steepens under stress.
Curvature
The second-order "smile" — how bid the wings are beyond the straight-line tilt. High curvature = the tails are priced at a premium; the market is paying for the extremes.
Curvature is the smile — far-OTM options on both sides bid above the straight-line tilt. High Curvature is the signature of priced tail risk.
Residuals
Whatever Level, Slope, and Curvature don't explain — idiosyncratic, strike-level mispricing. A big residual often flags a supply/demand pocket at one strike (or a data quirk).
The three are extracted so they don't overlap — a move in Slope doesn't contaminate your read on Curvature. That's the whole point: a single "skew" number blends all three, so you can't tell whether the curve steepened because vol rose, because puts got bid, or because the wings blew out. Each one points to a different trade.
Residuals are what the three components don’t explain — strike-by-strike noise. A big residual usually means concentrated open interest, not a regime signal.
Reading the three together
The combination is the regime. Level up, Slope steepening, Curvature spiking is classic stress — the COVID-2020 signature. Slope flattening toward zero while Level explodes is a demand-for-calls melt-up — the meme-squeeze signature. Curvature rich while Slope and Level are calm means the market is quietly paying for tails without an obvious directional fear. You only see those distinctions because the pieces are separated.
Free to read. Pull the three components on any name — ETFs (ETF Analytics), single stocks (ETF + Equities), full component history (Everything).
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