Volatility Skew

Volatility skew describes how implied volatility differs across strike prices for options sharing the same expiration. If markets matched the Black-Scholes assumption of constant volatility, IV would be flat across all strikes — in reality it is not.

For equity indices the typical shape is a downward (negative) skew: out-of-the-money puts carry higher implied volatility than out-of-the-money calls. This reflects persistent demand for downside crash protection and the fact that index sell-offs are sharp and correlated, while rallies tend to be slower. Plotting IV across strikes for one expiry produces the skew; doing so across strikes and expiries gives the broader volatility surface, and a U-shaped pattern is often called the volatility smile.

Traders read skew to gauge how the market is pricing tail risk and to find relative value — selling the expensive (high-IV) side and buying the cheap side, as in risk reversals and skew trades. A steepening put skew signals rising fear; a flattening one signals complacency.