Colloidal oatmeal is a product that consists of oats that have been ground very fine for use as a home remedy for itchy or dry skin.It typically is added to bathwater, creating a liquid that might be described as silky. The user soaks in this liquid for several minutes, and the oatmeal in the water coats the skin.eople who use colloidal oatmeal say that it is especially effective at treating skin conditions such as eczema, psoriasis, chicken pox and acne. The pain of sunburns, bug bites, poison ivy and other rashes may also be relieved using this home remedy.