Volatility Skew
Volatility skew refers to the asymmetric pattern of implied volatility across options strike prices at the same expiration, most commonly observed in equity markets where out-of-the-money puts carry significantly higher implied volatility than out-of-the-money calls.
Unlike the symmetric volatility smile seen in some markets, U.S. equity options markets exhibit a pronounced negative or left skew: put options below the current price of a stock or index consistently trade at higher implied volatility than calls above the current price. This structural asymmetry has been a persistent feature of the S&P 500 options market since the 1987 stock market crash, when the sudden realization of crash risk permanently altered how options were priced.
The skew reflects the supply and demand dynamics of options markets. Institutional investors and portfolio managers — who manage trillions of dollars in equity exposure — routinely purchase out-of-the-money puts as portfolio insurance. This persistent demand for downside protection bids up the price (and therefore the implied volatility) of puts relative to calls. At the same time, investors systematically sell covered calls to generate income, adding supply at out-of-the-money call strikes and suppressing call IV.
Measuring skew precisely involves comparing the implied volatility of options at different strikes. A common metric is the 25-delta risk reversal: the IV of the 25-delta put minus the IV of the 25-delta call. When this figure is negative, it confirms that puts are priced more expensively than calls — a downward skew. The CBOE offers several skew-related products and publishes a SKEW Index that measures the perceived tail risk of S&P 500 options at any given time.
For options traders, understanding skew has direct practical applications. Strategies that sell puts (such as cash-secured puts or bull put spreads) benefit from collecting elevated put premium. On the other hand, traders who want to buy puts for protection are paying an above-fair-value premium relative to historical norms. Recognizing when skew is extremely elevated or unusually low can provide context for whether these strategies are attractively priced.
Skew also interacts with other Greeks in complex ways. When skew is steep, the vanna and volga second-order Greeks become important for accurately hedging large options portfolios. Market makers and institutional desks spend significant resources modeling and managing skew exposure, as an unexpected flattening or steepening of the skew surface can create large P&L swings independent of the underlying stock price.