Volatility · Option pricing
Volatility Skew Explained: Why Puts Cost More and What the Skew Tells You
Volatility skew describes how options on the same underlying and expiration carry different implied volatility depending on the strike. On stock indices, out-of-the-money puts usually trade at clearly higher IV than out-of-the-money calls, because investors pay extra for protection against falling prices. A steep skew shows strong demand for hedging; a flat skew shows complacency.
By Daniel Berg ·
5% out of the money: put vs call
23% vs 18%
- 95 put (5% below price)
- IV 23%
- 100 at the money
- IV 20%
- 105 call (5% above price)
- IV 18%
- Shape
- Put skew (“smirk”)
Round, illustrative values for an index with 30 days to expiry, not market data.
What is volatility skew?
The Black-Scholes model assumes an underlying has a single volatility. If that were true, every option with the same expiration would show the same implied volatility, whatever the strike. When you back the IV out of actual market prices, though, each strike gives a different value. Plot those values against the strike and you get a curve; its shape is called the skew. Our implied volatility guide explains IV itself.
The skew is not a calculation error but information: the market values certain scenarios more highly than the simple model would. On stock indices that applies above all to sharp declines. Since the crash of October 1987, far out-of-the-money index puts have traded at a lasting premium; before it the curve was much flatter.
Smile, smirk, call skew: the typical shapes
Put skew (smirk)
IV rises clearly towards lower strikes and dips slightly towards higher ones. Typical for indices such as the S&P 500 and DAX and for most large single stocks.
Smile
Both wings sit above at-the-money IV and the curve is roughly symmetrical. Typical for currencies, where big moves in either direction are similarly likely.
Call skew
IV rises towards higher strikes. Seen in commodities with supply risk, in speculative stocks with takeover hopes, or in strong rallies.
The shape is not fixed. In a single stock a put skew can flatten ahead of an event or flip into a call skew, for example when investors buy calls in size, which is one of the ingredients of a gamma squeeze. In crypto the skew switches sides with the market phase more often.
Why index puts carry higher IV
- Demand for protection: pension funds, insurers and asset managers hold large equity portfolios and hedge them continuously with index puts. That demand is persistent and largely price-insensitive.
- Prices fall faster than they rise: declines often come abruptly, with gaps. The actual distribution of returns has a fatter left tail than the normal distribution assumes.
- Volatility rises when prices fall: swings grow in a sell-off. A put moving into the money therefore gains twice, from the price and from rising IV, and sellers charge extra for that.
- Sellers need a premium: whoever sells crash protection carries a rare but large risk of loss and wants to be paid for it.
On the other side, many investors sell calls against their holdings, for example through covered calls. That extra supply pushes down the IV of out-of-the-money calls. Together, the two produce the typical tilt.
How skew is measured
Skew is best compared by delta rather than fixed strike distances, because 5% away means something different for a calm stock and a jumpy one. Common measures are:
| Measure | Calculation | How to read it |
|---|---|---|
| 25-delta risk reversal | IV of the 25-delta call minus IV of the 25-delta put | Negative: puts richer (put skew). The more negative, the steeper. |
| Put skew vs ATM | IV of the 25-delta put minus at-the-money IV | How much extra protection costs relative to the at-the-money option. |
| Cboe SKEW Index | A measure of priced-in tail risk derived from S&P 500 options | 100 means no extra tail risk; higher readings mean more crash risk priced in. |
Many trading platforms show IV per strike directly in the options chain; our guide on how to read an options chain covers the columns. For a quick look, compare the IV of a put and a call with similar deltas.
Worked example: what skew does to the price
Black-Scholes values per unit, zero rates, round assumptions; not market data.
- Index
- 100
- Time left
- 30 days
- ATM IV
- 20%
- Strikes
- 95 put / 105 call
1Without skew
If both options had 20% IV, the 95 put would cost about 0.57 and the 105 call about 0.64. The call would even be slightly more expensive.
2With skew
At 23% IV for the put and 18% for the call, the 95 put costs about 0.80 and the 105 call about 0.49. The put now costs a good 60% more than the equally distant call.
3Further out
The 90 put at 26% IV costs about 0.25 instead of 0.07 without skew, more than three times as much. The further out of the money, the stronger the skew.
4Collar
Hedging with a long 95 put financed by a short 105 call costs about 0.31 net. A zero-cost collar would need the call closer to the price or the put further away.
Skew makes downside protection more expensive, and selling puts more lucrative, than a single-volatility model would suggest. Compare options by their own IV, not by premium alone.
What the skew says about market sentiment
A steep skew means investors are paying a lot for protection against falling prices relative to what an at-the-money move costs. A flat skew means that protection is comparatively cheap because demand for it is low. That is why a flat skew is often read as complacency and a steep one as fear.
Change tells you more than any single reading. If the skew keeps steepening in a rising market, investors are buying protection despite the good mood. A rising put/call ratio sends a similar signal.
Using skew in practice
- Sell puts rather than buy them: because out-of-the-money puts carry a premium above model value, sellers, for example of a cash-secured put or a bull put spread, collect more. The risk of a sharp decline remains; the skew only pays for it.
- Plan iron condors asymmetrically: at the same distance, the put side of an iron condor brings in more premium than the call side. Many traders therefore place the put strike further out or choose strikes by delta instead of distance.
- Build spreads that use the skew: in a bear put spread you buy the nearer put and sell a further one that is rich in IV, so the skew lowers the net cost. In a bull call spread, by contrast, you sell a relatively cheap call.
- Choose protection deliberately: puts near the money carry less skew premium than far out-of-the-money puts. Hedging with a nearer put spread can be cheaper than the “cheap” crash put.
- Treat ratio spreads with care: selling more puts than you buy harvests the skew but opens a large downside risk.
Frequently asked questions
What is volatility skew in simple terms?
Volatility skew shows that options on the same underlying and expiration have different implied volatilities at different strikes. On stock indices, out-of-the-money puts are usually more expensive than equally distant calls, because investors pay a premium for protection against declines.
What is the difference between a volatility smile and skew?
In a smile both wings, far out-of-the-money puts and calls, sit above at-the-money IV and the curve is roughly symmetrical, as is common in currencies. A skew is lopsided: on stock indices IV rises mainly towards lower strikes and dips slightly towards higher ones. That shape is also called a smirk.
Why are puts more expensive than calls?
In stocks and indices there is persistent demand for protection through puts, prices tend to fall faster than they rise, and volatility increases in sell-offs. At the same time many investors sell calls against their holdings. Together these lift put IV and depress call IV.
What does a steep skew mean?
A steep skew means protection against falling prices is especially expensive relative to the at-the-money option, so demand for crash protection is high. It is not a signal that a crash is coming; it can also mean many investors are already hedged.
What is a 25-delta risk reversal?
It is the implied volatility of a 0.25-delta call minus that of a −0.25-delta put with the same expiration. On stock indices it is usually negative because the put has the higher IV. The more negative it is, the steeper the put skew.
How can I use skew when trading?
Skew makes selling out-of-the-money puts relatively lucrative and buying crash protection relatively expensive. That leads to practical choices: placing the put side of iron condors further out, setting strikes by delta rather than distance, and considering put spreads instead of single far-out puts for protection.
Where to go next
All numerical examples in this guide are rounded, illustrative assumptions, not market data. The content is educational and not investment advice. Options are complex instruments; you can lose the entire amount invested, and more than that when selling options.