Volatility Skew

What Is Volatility Skew?

Volatility skew describes the variation in implied volatility across different strike prices of the same expiration. In equity markets, out-of-the-money (OTM) puts consistently trade at higher IV than OTM calls — this asymmetry is called "negative skew" or "put skew."

Why Skew Exists

Demand for downside protection: Large institutional investors (pension funds, endowments) constantly buy OTM puts to protect their equity portfolios against crashes. This persistent demand inflates the price (and thus IV) of downside puts.

Crash risk: Equity markets famously fall faster and harder than they rise. A stock index can fall 20% in weeks but rarely rises 20% in weeks. This asymmetry is baked into option prices.

Post-1987 memory: Before the 1987 crash, options prices were relatively symmetric. After Black Monday wiped out those who thought extreme downside was impossible, the market permanently repriced tail risk in puts.

Measuring Skew

The most common measure is the 25-delta risk reversal — the difference in IV between the 25-delta put and the 25-delta call. A larger negative number means more downside skew.

For example: if 25d puts trade at 22% IV and 25d calls trade at 18% IV, the skew is –4 volatility points.

Skew as a Market Signal

• Skew widening: Market buying more downside protection; fear increasing
• Skew collapsing: Demand for downside protection fading; complacency or short squeeze environment
• Positive skew (calls > puts): Occasionally seen in individual stocks with high short interest or in crypto — reflects more demand for upside calls than downside puts

Crypto Skew

Bitcoin often exhibits positive skew during bull markets — call IV exceeds put IV as participants chase upside rather than hedge downside. This is the opposite of equity markets and reflects crypto's different investor base.