Understanding volatility skew

Volatility skew is one of the most practically important concepts in advanced options trading , and one of the most commonly ignored by retail traders. It explains why two options that are equidistant from the current stock price can have dramatically different implied volatilities, and how understanding this asymmetry can improve both your strategy selection and your strike placement.

What skew is

In a world where options were priced according to a simple normal distribution of returns, options at equal distances above and below the current stock price would carry equal implied volatilities. The "volatility surface" would be flat.

Reality is different. In equity markets, OTM puts almost always carry higher IV than OTM calls at the same distance from the current price. This persistent asymmetry is volatility skew , specifically, the negative (or reverse) skew that characterizes most equity options markets.

Example: SPY is at $510.

• The $490 put (20 points OTM): IV = 22%
• The $530 call (20 points OTM): IV = 14%

Both are $20 from the current price, but the put has 8 volatility points more IV. That's skew.

Why skew exists in equity markets

The 1987 crash changed everything: Before Black Monday in 1987, equity options were priced with minimal skew. After the market fell 22% in a single day, investors recognized that downside tail risk was dramatically underpriced. Since then, market participants have consistently paid more for downside protection , inflating put IV relative to call IV.

Structural demand for puts: Portfolio managers, institutional investors, and risk managers continuously buy OTM puts as portfolio insurance. This persistent buying pressure inflates put IV. There's no equivalent structural buyer of OTM calls , call buying is primarily speculative, which is less consistent.

Asymmetric market behavior: Markets tend to fall faster than they rise (volatility clusters with downward moves). This asymmetry in actual return distributions justifies higher implied volatility for puts relative to calls.

Reading skew on an options chain

When looking at an options chain, compare the IV column across strikes:

Steep skew: Large difference between put and call IV at equal distances. Common in broad market indices (SPY, SPX) and during periods of market stress.

Flat skew: Small difference between put and call IV. More common on individual stocks in stable conditions, and on earnings names immediately after IV crush.

Positive skew (reverse skew): Rare in equity markets. Calls have higher IV than puts. Sometimes seen in commodities (oil, natural gas) where supply disruptions cause upside tail risk.

How skew affects your trading

Selling put spreads benefits from skew: When you sell a bull put spread, your short put carries elevated IV due to skew. This inflates the credit you collect relative to what you'd collect on a bear call spread at the same distance from the stock price. This is why bull put spreads are generally more attractive than bear call spreads in equity markets.

Iron condor asymmetry: In a standard iron condor, the put spread side typically collects more premium than the call spread side, even at the same delta. This is skew at work , and why many condor traders use asymmetric wing widths (wider put spread, tighter call spread) to better balance the credit across both sides.

Buying calls vs puts (the skew discount): When buying OTM calls, you're typically buying at lower IV than OTM puts of the same distance. This is a small structural advantage for call buyers vs put buyers , you're buying at "cheaper" volatility on the call side.

Calendar spread selection: Skew affects which strikes to use in calendar spreads. Strikes with elevated put skew may have term structure advantages that make them more attractive for calendar construction than equivalent-distance call strikes.

Skew as a risk signal

Beyond strategy construction, skew level is a useful market sentiment indicator:

Steeply elevated put skew: The options market is pricing in significant downside tail risk , often coincides with market uncertainty, macro concerns, or geopolitical risk. Not necessarily a reason to change your strategy, but worth noting.

Unusually flat skew: Put IV has compressed close to call IV , either because markets are extremely complacent or because a recent selloff has already repriced downside risk. Flat skew often precedes a return to normal skew levels.

Related terms: Implied volatility, IV rank, volatility smile, put option, bull put spread, iron condor

Try it on Stryke: Compare IV across strikes on the Options Screener to observe skew on any ticker.

---