Volatility skew is the pattern of implied volatility varying across strikes at the same expiration. In a world that matched Black-Scholes, every strike would price the same IV and the curve would be flat. It never is — and the shape of the deviation tells you where the market is paying for fear.
The shapes
Skew (or smirk) — the usual equity profile. Out-of-the-money puts carry higher IV than equivalent calls, and the curve slopes down from left to right.
Smile — both wings elevated above the at-the-money strike. Common in currencies and around events that could resolve violently either way.
Reverse skew — calls bid above puts. Shows up in commodities, and in equities during a squeeze, when upside hedging demand exceeds downside.
Why equity puts cost more
Two reasons compound:
Demand. Portfolios are structurally long. Everyone wants downside protection; far fewer need upside insurance. Persistent one-sided demand lifts put IV.
Mechanics. Markets fall faster than they rise. Selloffs correlate — everything drops together — while rallies grind. Realised downside volatility genuinely exceeds realised upside volatility, so the pricing is not merely sentiment.
Steep put skew is therefore the resting state, not a warning sign. It is only informative when it changes.
Reading changes
Steepening — protection is getting bid. Someone is paying up for downside, often before the spot market reflects any concern.
Flattening — complacency. Protection is cheap relative to upside, which historically has not been a comfortable place to be positioned.
Inverting — the call wing takes over. Squeeze dynamics, upside chase, or a pending bid.
Trading it
The skew tells you which wing is expensive and which is cheap, which is the entire basis for structuring around it:
- Sell the elevated wing, buy the cheap one.
- Ratio spreads exploit the curvature directly.
- Risk reversals trade the skew itself rather than direction.
And the defensive use, which matters more for most traders: if you are bearish and buying puts into steep skew, you are paying the most inflated premium on the board. A put spread — selling a further-out put against yours — recovers some of that. Knowing the shape of the curve stops you from buying the expensive part of it by accident.