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A volatility skew window is a unique window type, governed by its own application menu. To display a volatility skew window, display the Window Selection menu and select Default under the Vlty Skews heading, or enter the .VSKEW command.
A volatility skew is a graph that plots the implied volatility (Y axis) against the strike price (X axis) for a set of options on an underlying instrument. The implied volatility is the volatility of the underlying required for the theoretical value of the option to equal the market price of the option. Roughly speaking, a volatility skew is "U" shaped, the bottom of the "U" being the at-the-money strike. From there, the skew rises on both sides. This formation is sometimes referred to as the "smile" curve. The farther an option's strike is from the market price of the underlying instrument, the higher the option's volatility.
You can display a volatility skew on an underlying instrument by typing an instrument symbol into the window using the command line. Volatility skew windows accept instrument symbols and wildcards.
A volatility skew consists of two types of lines, input lines and the skew curve. The input lines are the implied volatilities (Y axis) of an instrument's calls and puts (X axis). The skew curve is a calculated line that renders a "best fit" curve to the input lines. The skew curve is always colored yellow. The colors of the input lines vary depending on how many expirations you display.
You can use a volatility skew to analyze the volatility on a specific option market, or you can apply it as input volatility for the pricing models in the rest of the options package (i.e., options charts and quote windows).