Crypto Volatility Term Structure and Skew
Crypto options markets often price short-dated volatility above long-dated volatility and, unlike equities, sometimes price upside moves as scarier than downside ones — both are readable signals of what the market is bracing for.
Prerequisites: Crypto Options Conventions and Inverse Contracts
Two options on the same coin, one expiring next week and one expiring in six months, almost never trade at the same implied volatility. Nor do a call and a put struck the same distance from the current price. Both gaps have a name — term structure for the first, skew for the second — and both are the options market's way of pricing in when it expects trouble and which direction it expects trouble from.
Term structure is how implied volatility differs across expiries; skew is how it differs across strikes at a single expiry. In crypto, term structure is usually upward-sloping except around known event dates, and skew frequently flips between "puts more expensive" (like equities) and "calls more expensive" (unusual outside crypto) depending on whether the market is bracing for a crash or a violent rally.
Term structure: pricing in when
Plot implied volatility against time to expiry for at-the-money options and you get the term structure. In calm periods, crypto's term structure typically slopes upward — longer-dated options carry higher implied vol than short-dated ones, because more time means more accumulated uncertainty. But around a known catalyst — a major protocol upgrade, an ETF decision date, a macro event — the term structure can invert, with near-dated options priced above longer-dated ones, because the market is pricing a specific near-term event, not a smooth accumulation of ordinary daily noise.
Skew: pricing in which direction
Skew compares implied volatility across strikes at the same expiry — typically, how a put struck below the current price compares to a call struck the same distance above it. In equity index options, skew is almost always negative: puts are persistently more expensive, because investors pay up to insure against crashes, and crashes historically happen faster and harder than rallies. Crypto frequently shows the opposite pattern at times: calls trading richer than puts, because a sharp upward move (a short squeeze, an ETF approval, a supply shock) has historically been at least as violent and sudden as a downward one, and traders are willing to pay up for convex upside exposure.
Worked example
On a given day, 25-delta puts on BTC one month out trade at 68% implied vol while 25-delta calls the same distance out-of-the-money trade at 74% — call skew, calls richer than puts, consistent with the market bracing for an upside catalyst (say, a pending regulatory decision widely expected to be favorable). Three months later, sentiment has reversed after a string of exchange failures: the same structure now shows puts at 80% against calls at 71% — put skew, the more familiar "crash insurance costs more" pattern seen in equities. The skew flipped entirely based on which tail the market was more afraid of, not because volatility itself simply rose or fell.
What this means in practice
A trader reading the vol surface is really reading a map of collective fear: an inverted term structure marks a dated event the market is pricing discretely; skew direction marks which tail — up or down — carries the perceived fatter risk right now. Both move fast and can flip within days around news, unlike equity skew, which is far more persistently negative.
Don't assume crypto skew behaves like equity skew by default. Equities almost always price puts richer than calls; crypto genuinely alternates, and trading a "buy puts, they're always cheap relative to calls" strategy borrowed from equities can lose money for long stretches in a market where calls are the side persistently in demand.
Related concepts
Practice in interviews
Further reading
- Deribit, 'Volatility Term Structure and Skew'
- Genesis Volatility, 'Reading the Crypto Vol Surface'