there's a variety of reasons skew leans one way or the other... it gets complicated fast... as to the collars, yes.. MMs do it, traders and investors do it, HFTs do it, hedge funds do it... also, it doesn't have to be all collars... some people are buying puts, some people are selling covered calls, some are doing both... there's also conversion and reversal, where you place skew-based trades then convert them into arbitrage trades if they make a strong enough move in your direction... you buy 100 shares of SPY and buy a long put... stock moves up far enough and you can sell a call to synthetically close the position and lock in the profit - basically legging into a collar put-first... it's even "easier" when you're an MM and you get to play the bid-ask spread... typically, if everyone is long the stock you'll have put skew and if everyone is short the stock you'll have call skew... call skew in HTBs has a lot to do with borrowing fees for short positions, but that's it's own independent topic entirely... skew is one of those things that people are usually taught to trade around... e.g., if you're running an iron condor, you have to set your strikes on one spread farther away than your other other spread to maintain delta neutrality, because of the skew... the thing is, that's not necessarily the best way to take advantage of it... also, sometimes the skew isn't put or call skewed, it's neutral... sometimes neutral skew, or even call skew, appears because of an earnings date, or, often, markets have a strange way of predicting the future... as an example, in the weeks prior to growth/tech pulling back and commodities/energy sectors rising, call skew started appearing in places it rarely does... indexes/sector ETFs rarely ever have call skew, for instance, but it was showing up in XLE around the 50/54 strikes for june... consumer defensives also started showing neutral and/or call skew through may, june, and july... i have a trading friend who noticed call skew in IWM at the bottom of the corona crash... you can't always say 100% for sure what's causing it with call skew, but with put skew 9/10 times it's investors and institutions hedging long positions... most professional investors that aren't specifically trading volatility are using options as a hedge against long/short stock positions, not as standalone trades in and of themselves... you can also think of skew in terms of a volatility curve... in a put skew, the expectation is either a grind up or a crash down... that's what indexes do, right? in call skew, the expectation is either a crash up or grind down... this occurs in HTBs specifically because the short interest is so high that when a run up occurs its easy to create a mini short squeeze - thus, when HTBs (i.e., meme stonks and high fliers) pump they tend to go parabolic, then just bleed profusely for however long until some new catalyst makes them jump... those parabolic run ups are in large part due to shorts having to cover on the run up... go look at the chart on MVIS... prime example of cyclic short squeezes, and MVIS has some of the highest call skew in the market + some of the highest short interest in the market as well... often times you can see these cyclic short squeezes happening just before major options expirations as well!
Thanks for the information. I have been looking for an option to choose in place of the ones that I have already been using.
Guys, not everything daytona said is wrong; but a large part of the skew outside of disrupted markets is fair value, not an artifact of excess buying and selling demand. Options further otm have vega convexity; they will pick up vegas as IV increases. This convexity has value so the price of the option will be higher than it would be if it was at the money and could only lose vega. And because we use BSM to take price and solve for an IV figure; the additional value in there gives a higher vol figure. Also, if you trade enough options you realize it's not as simple as collecting the spread between whatever vol you sold and what the underlying realized. If you sell a distant put for 30 vol for $1, and nine out of ten times we grind up on 15 vol, you will probably make 0.70 or something on the vol. You have low gamma so the implied - realized spread won't generate that much PnL. What happens the one time spot actually trades local to your strike? What kind of vol is it going to be realizing when you actually have gamma? We already established broad markets grind up and crash down. So option priced are influenced by the market consensus of the kind of vol we will be realizing when we are actually trading around the strike. Now when you have a ton of gamma and you sold 30vol and realized 40vol, you are going to lose a lot more than 0.70. This is also why HTB stuff has call skew. Realized vol will be higher when we're going up because of capitulations and thin liquidity. So you can't just take the average of all outcomes and naively merge them thinking you're capturing a ton of expected value. Some of the skew in placed like index is bid beyond a "fair" curve, because people and institutions will pay some risk premium to limit their value at risk. But even that isn't free money, they are renting the balance sheet of the seller. Selling deep down & outs may make 5% a year excess returns, but you have to carry big mark to market losses during crashes when there are a lot better things to be doing with the capital. Skew is an easy place to get attracted to as a newer trader but it's more nuanced than you think. I am almost always long the down and outs against my PnL generating positions so I can lever them up further. Most other successful traders I know running $1m+ also would much sooner buy 5delta junk than sell it. The longer you're at this hopefully you will start understanding why that is.