What is volatility skew? Implied volatility across strikes

Each option’s price implies a volatility: the value that, plugged into a pricing model, reproduces the market price. Do that for every strike in one expiration, plot the results, and you get the volatility curve. Standard pricing models behind the options Greeks assume a single volatility for the underlying, so the curve shows where the market disagrees: which outcomes it considers more likely, or more worth insuring, than the model’s bell curve.

Two shapes are worth knowing. A smile is roughly symmetric: IV is lowest near the current price and rises for both low and high strikes, as the left side of the drawing at the top shows. A smirk, or skew, is lopsided: IV is high at low strikes and falls steadily toward high strikes, the usual shape for stock index options. Skew is usually measured by comparing strikes the same distance from the price, or by delta, for example the 25-delta put against the 25-delta call.

Why index puts cost more: demand for protection and the 1987 crash

Stock indexes tend to fall faster than they rise: sharp sell-offs come with volatility spikes, while rallies are usually slower and calmer. Large investors who hold stocks buy index puts to protect their portfolios, and there are fewer natural sellers of that protection, so downside strikes carry a premium. Dealers who sell those puts take on crash risk and charge for it.

The pattern became entrenched after the crash of October 19, 1987, when the Dow Jones Industrial Average fell about 22.6% in a single day. Academic studies of S&P 500 options, notably by Mark Rubinstein, found that implied volatility across strikes was relatively flat before the crash and clearly sloped afterward, and the slope has persisted. Option prices have carried a memory of how fast markets can drop ever since.

A useful mental picture: with the index at 100, a put at 90 and a call at 110 are both 10% away, but the market treats a 10% fall within a month as more likely, and more costly to be caught by, than a 10% rise. The protective put guide shows what that premium buys.

When calls carry the skew: commodities and squeezed stocks

Skew points to where the market fears a sudden jump. For many commodities the feared move is up: a drought, a freeze or a supply disruption can send prices of crops, natural gas or other raw materials sharply higher, so out-of-the-money calls can carry the higher IV. This is called a call skew, or forward skew.

Single stocks vary. Many large stocks show a milder put skew than the index. A heavily shorted stock in a squeeze, or one with a takeover rumor, can develop a call skew as traders scramble for upside exposure and short sellers buy calls to hedge, as covered in short squeeze. Skew shapes change with news, so read each chain as it is today rather than assuming a shape.

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Two IV curves against strike price from 80 to 120. Left, labeled stock index, put skew: IV highest at low strikes and sloping down to the right, with an arrow toward the low strikes and the note fear: a sharp drop. Right, labeled commodity or squeezed stock, call skew: IV lowest at low strikes and rising to the right, with an arrow toward the high strikes and the note fear: a sudden jump.

The term structure of implied volatility: contango and inversion

Skew compares strikes within one expiration; the term structure compares IV across expirations, usually at the money. In calm markets the curve tends to slope upward: near-term options carry lower IV than longer-dated ones, because more can happen over a longer horizon. This upward slope is often called contango, a term borrowed from futures.

Under stress the curve inverts: near-term IV jumps above longer-dated IV because the danger feels immediate. Hypothetical: in a calm market, 7-day IV is 13%, 30-day 15%, 90-day 17.5% and 180-day 19%; in a sell-off, 7-day IV is 38%, 30-day 32%, 90-day 26% and 180-day 24%. A single stock before earnings shows a local version: the expiration right after the report carries a hump of extra IV, which usually collapses after the news, the IV crush covered in the implied volatility guide.

For the S&P 500 you can watch the term structure with two Cboe indexes: the VIX, which looks 30 days ahead, and VIX3M, which looks three months ahead. On TradingView, CBOE:VIX/CBOE:VIX3M above 1 means the near term is pricing more volatility than three months out, an inverted structure. A calendar spread is the strategy most directly exposed to the shape of the term structure.

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At-the-money implied volatility by days to expiration (7, 30, 60, 90 and 180). The calm curve slopes up from 13% to 19%, labeled calm: contango (normal). The stress curve, in red, slopes down from 38% to 24%, labeled stress: inverted. A note reads hypothetical values.

Measuring skew: risk reversals and the Cboe SKEW Index

A risk reversal is the simplest skew number: the IV of an out-of-the-money call minus the IV of an equally out-of-the-money put, usually at 25 delta. Hypothetical: the 25-delta call trades at 16% IV and the 25-delta put at 24%, so the risk reversal is 16 − 24 = −8 points. Negative means puts are richer. A move from −8 to −12 means protection has become relatively more expensive, and a move toward zero means the fear premium is fading. The same name also describes a trade, buying one side and selling the other, which this lesson does not cover.

The Cboe SKEW Index sums up the same idea for the S&P 500. It is calculated from the prices of out-of-the-money S&P 500 (SPX) options and estimates how lopsided the market expects returns over the next 30 days to be. A reading of 100 means no extra weight on a large decline; higher readings mean investors are paying more for protection against one. Cboe consulted on changes to the methodology in 2025, so check its current description before comparing readings across years. On TradingView the symbol is CBOE:SKEW.

Neither number times the market. Studies have found that a high SKEW reading is a weak predictor of crashes: it measures the price of insurance, not the probability that the house burns down. Read skew alongside the VIX, which measures the overall level of IV, and the put/call ratio, which measures trading activity.

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A skewed IV curve with two dots: the 25-delta put at 24% IV on the left and the 25-delta call at 16% IV on the right, each joined to the vertical axis by a dotted line. A card beside it reads risk reversal: call IV − put IV, 16 − 24 = −8 points, with the notes negative: puts richer and toward zero: less fear premium.

How skew changes option prices and spread choices

Skew does not tell you what to trade, but it changes what each structure costs. A few effects to know before you price a trade:

  • Buying an out-of-the-money put on its own means paying the skew premium in full.
  • A vertical spread with puts partly offsets skew: the put you sell sits at a lower strike with an even higher IV, so it recovers part of what you paid.
  • Selling a put credit spread brings in more premium than an equally distant call credit spread, because the put side carries more IV. The extra credit is payment for crash risk, not free money.
  • An iron condor with equally distant wings is lopsided in a skewed market: the put spread brings in more credit than the call spread. Traders who want a more balanced position often place the put side further away, which is a choice about risk, not a fix for it.
  • A straddle or strangle buyer pays the at-the-money IV and, for the strangle, the IV of both wings; skew decides which wing is expensive.
  • Skew moves: in a sell-off the whole curve usually rises and often steepens, so a position that is short puts can lose from the price move and from rising IV at the same time.

How to read skew in an options chain and on TradingView

Most options chains show an IV column next to each strike, and many show delta too. On TradingView, the options chain (Products > Options, or the Options tab on a symbol page) lists implied volatility for each strike, and the Volatility tab shows IV across the chain; the trade options with TradingView guide walks through both. For a market-wide view, chart CBOE:SKEW and CBOE:VIX/CBOE:VIX3M.

To read skew in any chain, follow these steps:

  1. Pick one expiration, roughly 30 days out, so time to expiration is the same for every strike.
  2. Note the at-the-money IV as your reference.
  3. Read the IV of out-of-the-money puts going down from the current price, and of out-of-the-money calls going up.
  4. Compare equal distances, for example 5% below and 5% above, or the 25-delta put and call: the side with the higher IV carries the skew.
  5. Check again on another day or after a big move to see whether skew is steepening or flattening.

Worked example: pricing skew into puts and spreads (hypothetical)

A hypothetical index ETF trades at $500. For options expiring in 30 days, the chain shows the 450 put at 28% IV, the 475 put at 22%, the 500 strike at 17%, the 525 call at 14% and the 550 call at 13%. Using the Black-Scholes model with a 4% interest rate, those IVs give these prices per share: 475 put $3.28, 450 put $1.54, 525 call $1.32 and 550 call $0.04.

Compare the two options 5% from the price: the 475 put costs $3.28 and the 525 call $1.32, about 2.5 times less. Priced at a flat 17% IV, the 475 put would cost about $1.56, so skew more than doubles its price.

Now a 475/450 bear put spread: buy the 475 put at $3.28 and sell the 450 put at $1.54, a debit of $1.74, or $174 per contract, for a spread worth at most $25. At a flat 17% the same spread would cost about $1.46. Skew added $1.72 to the single put but only $0.28 to the spread, because the put you sold is also rich.

The same numbers explain iron condors: the 475/450 put credit spread brings in $1.74, while the 525/550 call credit spread brings in $1.28 ($1.32 − $0.04), although both sit 5% away. The put side pays more because the market charges more to carry downside risk. Real chains add bid-ask spreads and commissions, and IV changes all the time.

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A hypothetical 30-day chain at a price of 500, with five strikes on a falling IV curve: 450 at 28%, 475 at 22%, 500 at 17%, 525 at 14% and 550 at 13%; the 450 and 475 points are circled. Two cards: 5% from the price, the 475 put costs $3.28 against $1.32 for the 525 call; the 475/450 put spread costs 3.28 − 1.54 = 1.74, against 1.46 at a flat 17%. A note reads Black-Scholes, 30 days, 4% rate.

Common mistakes with volatility skew

Skew is easy to misread. The usual traps:

  • Reading skew as a forecast: rich puts mean protection is expensive, not that a fall is coming. Index skew has stayed steep through long rallies.
  • Comparing strikes from different expirations: skew is read within one expiration; across expirations you are looking at the term structure.
  • Calling a put overpriced because its IV is above the at-the-money IV: that premium is normal for an index; the useful question is whether skew is high or low compared with its own history.
  • Selling rich puts without a plan for a crash: the skew premium exists because sharp drops happen, and short puts can lose many times the premium collected. Defined-risk structures and small sizes limit the damage.
  • Ignoring liquidity: far out-of-the-money strikes often have wide bid-ask spreads, so the IV shown may not be a price you can actually trade.