What is volatility skew?
In one line: Volatility skew is the pattern where options at different strikes on the same stock carry different implied volatility, usually with downside puts priced higher than upside calls because buyers pay up for crash protection.
How it works
If stock moves were perfectly random, every strike on the same expiry would show the same Implied volatility. They don't. On most stocks and on index products, puts below the price show higher IV than calls the same distance above it. Plot IV by strike and the line tilts. That tilt is the skew.
The reason is simple. Stocks fall faster than they rise, and people who own shares buy puts for protection. Demand for downside puts pushes their price, and so their IV, higher. Calls above the price have fewer buyers, so they're cheaper in IV terms.
For a seller it means the two halves of the wheel strategy aren't priced the same. A put 10% below the price pays more than a call 10% above it, at the same Delta-ish distance. You're being paid extra to take the side everyone is afraid of.
An example (hypothetical)
An illustration, not a trade idea. Made-up stock XYZ trades at $50, 30 days to expiry.
| Option | Strike | Distance from price | IV | Premium |
|---|---|---|---|---|
| Put option | $45 | 10% below | 38% | $1.00 |
| Call option | $55 | 10% above | 26% | $0.45 |
The put pays more than double the call at the same distance. That's the skew in dollars.
Now suppose you sell the $45 put for the richer premium and XYZ does the thing skew is pricing: it falls hard.
| XYZ at expiry | Short $45 put | Short $55 call (with 100 shares at $50) |
|---|---|---|
| $55 | +$100 | +$500 on shares + $45 = +$545 (the cap) |
| $50 | +$100 | +$45 |
| $40 | Assigned at $45: +$100 − $500 = −$400 | −$1,000 on shares + $45 = −$955 |
The put's bigger premium was the market paying for exactly that last row. It cushioned $100 of a $500 drop.
Why it matters for sellers
Skew is why selling puts "feels" better paid than selling calls. It's also why that feeling needs a check. The extra premium isn't free money; it's compensation for the side that hurts more when it hurts.
Three practical reads:
- Steep skew (puts far more expensive than calls) means the market is nervous about a drop. Premium is rich, and so is the reason.
- Flat skew often shows up in calm, slow stocks. Puts and calls pay about the same.
- Reversed skew, where calls carry higher IV, happens in names the crowd expects to squeeze upward. Covered calls pay well there, and the cap bites.
A good habit: when choosing between selling a put or a call on the same stock, look at the IV of each strike, not just the premium. The side with the higher IV is the side with the fear.
Questions
Why do puts have higher implied volatility than calls?
Because share owners buy puts for protection, and because stocks tend to fall faster than they rise. That demand lifts put prices and the IV read from them.
Does volatility skew help option sellers?
It raises the premium on the put side. It also means the put side carries the risk the market is paying you for. The extra premium is a cushion, not protection.
How do I see the skew on an options chain?
Look at the IV column on the Options chain for one expiry. Compare a put below the price with a call the same distance above. The difference is the skew.
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