Volatility Skew and the Volatility Smile
A single stock does not have one implied volatility — it has a different IV at every strike. Plot those IVs and you get the volatility skew (or smile): the shape of the curve that tells you how the market is pricing fear and demand across strikes. Reading it is the layer of insight above a basic IV number.
Open the Iron Condor calculator →Why IV differs by strike
Black-Scholes assumes one constant volatility, but real markets don’t. Demand for protection and the way prices actually move push implied volatility higher at some strikes than others, so each strike carries its own IV. The collection of those IVs, plotted against strike, is the skew.
It exists because returns are not the neat bell curve the model assumes: crashes are faster and deeper than rallies, and traders pay up for downside insurance. That persistent demand bends the IV curve into a recognisable shape.
Equity skew vs the smile
In equity index options the curve is usually a downward skew: out-of-the-money puts carry higher IV than out-of-the-money calls, because investors buy puts as crash insurance and sell calls for income. The further out-of-the-money the put, the richer its IV — a "fear premium".
In currencies and some commodities the curve is more symmetric — a volatility smile, where both far-OTM puts and far-OTM calls are bid up. The shape is a fingerprint of what that market fears: one-sided crash risk skews; two-sided shock risk smiles.
What the curve tells you
Skew tells you where premium is rich. Because OTM puts carry the highest IV, put-credit spreads and the put side of an iron condor sell into that fear premium — you are paid more for the same distance. It also warns you: a steep skew means the market is pricing a sharp downside move, so be wary of being short those puts naked.
Term structure is the time version of the same idea — IV across expirations. It normally rises with time, but inverts before a known event (earnings) when near-dated IV spikes and then collapses. Reading both the strike skew and the term structure turns "IV is 40%" into an actual edge.
- A stock has a different implied volatility at every strike — the curve of those IVs is the skew.
- Equity options usually show a downward skew: OTM puts are bid up as crash insurance.
- A symmetric curve is a "smile"; the shape reveals whether a market fears one-sided or two-sided shocks.
- Skew shows where premium is rich (the put side); term structure shows the earnings IV-crush.
Frequently asked questions
What is volatility skew?
It is the pattern of implied volatility differing by strike. In equities, out-of-the-money puts typically have higher IV than calls because of steady demand for downside protection — the "put skew".
What is the difference between skew and a volatility smile?
A skew is lopsided — one side (usually the puts) carries higher IV. A smile is roughly symmetric, with both far-OTM puts and calls bid up. Equities tend to skew; currencies often smile.
How do options traders use the skew?
It shows where premium is richest. Because OTM puts carry the highest IV, put-credit spreads and iron-condor put sides are paid more for the same distance. A very steep skew also warns that the market expects a sharp downside move.
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