Volatility
Volatility Skew
Also called: skew, volatility smile
Volatility skew is the pattern of different implied volatilities across strikes for the same expiration. In equities, out-of-the-money puts usually carry higher IV than equivalent calls, reflecting demand for downside protection and the tendency of markets to fall faster than they rise.
If Black-Scholes held exactly, every strike would share one IV. Instead the IV curve slopes and bends: the slope is skew, the curvature is the "smile". Steep put skew means the market is paying up for crash protection; flat or inverted skew, with calls richer than puts, appears in names with takeover or squeeze potential.
Skew changes the economics of spreads. Selling a richer put to finance a cheaper call (a risk reversal) or selling a high-IV put spread harvests skew. Skew also distorts delta as a probability estimate: a 25-delta put is typically further from the money than a 25-delta call.
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Frequently asked questions
Why do puts have higher implied volatility than calls?
Persistent demand for portfolio insurance, and the empirical fact that equity drawdowns are sharper than rallies. Sellers of downside protection require extra premium for the tail risk.