Volatility skew vs smile: why the put pays more than the call
A skew means implied volatility climbs on one side of the chain, usually the puts. A smile means it climbs on both sides, so the chart of IV looks like a grin. For a put seller, the skew is the reason a put pays more than a call the same distance away.
The short answer
Both words describe the same chart: Implied volatility (the market's guess at how much a stock will move) drawn strike by strike.
- Skew: IV is higher on one side. On most stocks and on stock indexes, it is the put side. The chart slopes down from left to right.
- Smile: IV is higher on both sides and lowest near the current price. The chart curves up at both ends.
For a seller, the shape tells you where the extra premium is. With a put skew, a put pays more than a call the same distance away. That extra is not free. It is the market's price for a fast drop.
Side by side
| Volatility skew | Volatility smile | |
|---|---|---|
| Shape | Slopes: one side higher | Curves up on both sides |
| Where IV is highest | Usually far puts | Far puts and far calls |
| Where you see it most | Stock indexes and most large stocks | Some single stocks, commodities, currencies |
| What drives it | Fear of a crash; people buy puts to protect | Fear of a big move either way |
| What a put seller notices | Puts pay more than calls at the same distance | Both wings pay more than a flat model says |
| The catch | The extra pays for real drop risk | Big moves happen both ways |
These are general shapes. Each stock's chain has its own, and it changes from day to day. Before earnings or a takeover rumour, the call side can lift too. The Volatility skew glossary page covers the basic idea.
A five-strike table (hypothetical)
Take a made-up stock, Cobalt Mining, at $100, with 30 days to expiry. Here is a skewed chain. Premiums come from a simple pricing model with no interest, so treat them as round illustrations.
| Strike | Type | Distance | IV | Premium | Delta |
|---|---|---|---|---|---|
| $90 | Put | $10 below | 34% | $0.66 | −0.13 |
| $95 | Put | $5 below | 31% | $1.52 | −0.27 |
| $100 | Put or call | At the price | 28% | $3.20 | ±0.50 |
| $105 | Call | $5 above | 26% | $1.18 | 0.27 |
| $110 | Call | $10 above | 25% | $0.32 | 0.10 |
Read it in pairs:
- The $95 put and the $105 call are both $5 away. The put pays $1.52, the call $1.18.
- The $90 put and the $110 call are both $10 away. The put pays $0.66, the call $0.32. That is about twice as much.
Now the test. If IV were a flat 28% everywhere, the $90 put would cost only about $0.34. The skew nearly doubles it. That gap is what the put seller is paid for.
What the extra premium buys you, and what it costs
Say you sell the $95 put for $1.52 ($152). Here is how it ends (hypothetical, before fees):
| Stock at expiry | What happens | Result |
|---|---|---|
| $100 | Put expires | +$152 |
| $95 | Put expires at the strike | +$152 |
| $90 | Assigned at $95: −$500 + $152 | −$348 |
The skew paid you more than the matching call would. It did not make the drop smaller. Puts cost more because drops tend to come fast, and buyers pay up to protect against them. When you sell that protection, you take the fast drop if it comes.
Higher put IV is a reason the premium looks good. It is not a reason to sell more of it.
When the smile shape matters
A smile shows up when the market fears a big move in either direction. That is common in some single stocks, in commodities and in currencies. For a seller, a smile means the far calls are pricey too. A Covered call far above the price can pay more than you expect, and so can a far put.
On a stock index the shape is usually a skew, sometimes called a "smirk": far puts high, far calls low. That is why index call sellers often get less for the same distance than put sellers do.
Which shape should change your plan?
| If the chain shows a steep put skew… | If the chain shows a smile… |
|---|---|
| Puts pay more; size so a drop to the next strike is fine | Both wings pay more; ask what event is coming |
| Compare the put to the call at the same delta | Check for earnings or news inside the trade |
| Expect assignment when drops come fast | Expect either side to be tested |
The shape is one input. The strike still has to be a price where you would own the shares. The options strategy comparison chart shows which strategies lean on puts and which on calls. If you run the wheel strategy, the skew is part of why the put side often pays more than the call side.
Questions
What is the difference between volatility skew and smile?
A skew is IV higher on one side of the chain, usually the puts. A smile is IV higher on both sides with the low point near the current price. Both describe how IV changes from strike to strike.
Why do puts have higher implied volatility than calls?
Many investors buy puts to protect stock they own, and drops tend to happen faster than rallies. That steady demand lifts put prices, which shows up as higher IV on the put side.
Is selling puts into a steep skew a good idea?
It pays more, and the extra pays for real risk. A steep skew often means the market is worried about a drop. Size the trade so assignment at the strike is something you can carry.
Does every stock have a volatility skew?
Most large stocks and stock indexes show a put skew. Some stocks, commodities and currencies show more of a smile. Look at the chain for the stock you trade; the shape can change before earnings or news.
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