Volatility Skew - Why Out-of-the-Money Puts Cost More
Reviewed by Leon Moyer - Published October 9, 2026 - Last reviewed October 9, 2026
In this lesson
Read the implied volatility of several strikes in one expiration, describe the skew as a smirk or a smile, and explain how skew changes the prices of out-of-the-money puts and calls.
Volatility skew is the pattern of implied volatility across the strikes of a single expiration. On most stocks and indexes, out-of-the-money puts trade at higher implied volatility than at-the-money options, and out-of-the-money calls trade lower.
Course 1 treated implied volatility as one number per stock. That was a simplification. Every strike on an options chain has its own implied volatility, solved backward from its own price, and the strikes rarely agree. The shape they make tells you which options the market is paying up for.
What is volatility skew in options?
The Options Industry Council defines skew as "the difference between the implied volatility levels of out-of-the-money (OTM), at-the-money (ATM) and in-the-money (ITM) options" within the same expiration (OIC: Volatility Skew and Options).
Pick one expiration, read the implied volatility beside each strike, and plot those numbers against the strikes. That curve is the skew. If implied volatility were the same everywhere, the curve would be a flat line, which is what a plain Black-Scholes model assumes. Real chains are almost never flat.
Why are out-of-the-money puts more expensive?
Three forces push the downside strikes up on most stocks and indexes:
- Hedging demand. Investors who own shares buy puts to protect them. That steady buying lifts the price, and so the implied volatility, of strikes below the stock.
- How markets fall. Large drops have historically come faster than large rallies. A seller of a far out-of-the-money put asks to be paid for that risk.
- History. The OIC notes that skew "arguably became more pronounced and evident following Black Monday on Oct. 19, 1987," when the Dow fell more than 22% in one session.
The OIC adds a caution: puts are not always dearer than calls. The pattern describes out-of-the-money puts against out-of-the-money calls in a smirk.
Worked example
Reading the skew on a hypothetical XYZ chain
New setup for this module: XYZ trades at $50, and options expiring in 45 days show these implied volatilities:
Implied volatility falls by 2 points for every $2.50 of strike, rising toward the downside. This is a smirk: high on the put side, low on the call side. It is the free calculator's surface with Base Implied Volatility at 30 and Skew at 4, which adds 4 points for each 10% a strike sits below the stock and subtracts 4 for each 10% above.
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
Implied volatility by strike: a smirk and a smile
Smirk (calculator Skew 4): IV points versus the 50 strike
Smile (illustration): IV points versus the 50 strike
The calculator's skew is a straight line, a teaching simplification. On real single-stock chains the call side often flattens out, or turns back up into a smile, far from the money, so read the actual implied volatility of any strike you trade.
What is the difference between a volatility smile and a smirk?
The OIC describes two common shapes, a smile and a smirk:
- Smirk. One side is elevated and the other sits lower. Downside puts on stocks and indexes are the usual example: the curve slopes down from left to right, which traders often call put skew or reverse skew.
- Smile. Both out-of-the-money puts and out-of-the-money calls carry higher implied volatility than at-the-money options.
A binary event, such as a drug trial result, can produce a smile. A third pattern, forward skew or call skew, elevates the upside when traders fear missing a rally more than a drop.
The shape is not fixed. It can steepen in a selloff, when demand for protection jumps, and flatten in a calm market. So compare a stock's skew with its own history, the way Course 1's IV Rank and IV Percentile lesson compares its overall implied volatility level.
How does skew change option prices?
Skew changes the price of every option away from the money, even when the at-the-money implied volatility stays put. In the XYZ example, the 50 strike is priced at 30% either way, so the at-the-money options cost the same with or without skew. The wings do not.
Worked example
The same two XYZ options with and without skew
XYZ at $50, 45 days to expiration, a 4.5% interest rate, priced with the calculator's Black-Scholes engine.
- 45 put: $0.37 at a flat 30%, $0.54 at 34% with skew. Skew makes it about 46% more expensive.
- 55 call: $0.60 at a flat 30%, $0.41 at 26% with skew. Skew makes it about 32% cheaper.
Notice the flat-volatility prices. Even with no skew, the 55 call costs more than the 45 put. Black-Scholes assumes the stock's log returns are normally distributed, so prices can rise without limit but cannot fall below zero. A $5 rise is a smaller move than a $5 drop in log terms, and the upside has a longer tail, so the out-of-the-money call carries more expected payoff. The interest rate adds a little to calls too. Skew reverses that: the 45 put now costs more than the 55 call.
Closer to the money the gap is smaller: the 47.5 put moves from $0.95 to $1.07, and the 52.5 call from $1.22 to $1.09.
Illustrative and hypothetical. The ticker and prices are invented for teaching, and the figures exclude commissions, fees, margin interest and taxes, which reduce real results. Past or hypothetical outcomes do not indicate future results.
Skew makes the downside put dearer and the upside call cheaper
XYZ 45 put, per contract
XYZ 55 call, per contract
This matters for any strategy with legs at different strikes. Buying a downside put means paying skew; selling one means collecting it. A trader who compares premiums without looking at each strike's implied volatility can mistake skew for a bargain or a rip-off. How Skew Prices Collars and Risk Reversals works through two strategies where skew decides the net cost.
How do you read skew on a real options chain?
A few habits keep the comparison fair:
- Stay within one expiration. Skew compares strikes; comparing expirations is the term structure, covered in Volatility Term Structure.
- Compare equal distances. Set a put and a call the same distance from the stock, such as 10% below and 10% above, and compare their implied volatilities. Some platforms measure distance by delta instead, for example the 25-delta put against the 25-delta call.
- Use the mid price. Wide bid-ask spreads on far out-of-the-money strikes can distort a single implied volatility reading.
- Check the index. Cboe publishes a SKEW Index, calculated from at-the-money and out-of-the-money S&P 500 options, which its SKEW white paper describes as an indicator of "perceived tail risk." It reflects the index, not any single stock.
Check your understanding
A stock trades at $100. The 90 put shows 36% implied volatility, the 100 strike 30% and the 110 call 27%. Is this a smirk or a smile?
Show answer
A smirk. The downside put is elevated by 6 points and the upside call sits 3 points below the at-the-money level, so only one side is raised.
In the XYZ example, why does the 45 put cost $0.54 with skew but only $0.37 without it?
Show answer
With skew the 45 strike is priced at 34% implied volatility instead of 30%. Higher implied volatility means a higher premium, everything else equal.
Does steep put skew mean the stock is likely to fall?
Show answer
No. It means downside protection is in demand and priced high relative to other strikes. It describes the cost of insurance, not a forecast of direction.
Key takeaways
- Volatility skew is the pattern of implied volatility across strikes in one expiration.
- Stock and index options usually show a smirk: out-of-the-money puts carry higher implied volatility than at-the-money options and out-of-the-money calls.
- A smile raises both wings; it can appear before binary events.
- Skew changes the price of every option away from the money, so multi-strike strategies pay or collect it.
- Compare equal-distance strikes in the same expiration, and compare a stock's skew with its own history.
Common questions
What is volatility skew in options?
Volatility skew is the difference in implied volatility between strikes of the same underlying and expiration. On most stocks and indexes, out-of-the-money puts trade at higher implied volatility than at-the-money options and out-of-the-money calls.
Why do puts have higher implied volatility than calls?
Mainly demand for downside protection. Investors who own stock buy puts to hedge it, and sharp market drops have historically been faster than rallies, so sellers ask for more for downside strikes. It is the out-of-the-money puts that are dearer, not every put.
What is the difference between a volatility smile and a smirk?
In a smile, both out-of-the-money puts and out-of-the-money calls carry higher implied volatility than at-the-money options. In a smirk, one side is elevated, usually the downside puts on stocks and indexes, while the other side sits lower.
Is high skew bullish or bearish?
Neither on its own. Steep put skew shows that downside protection is in demand and relatively expensive. It describes the price of insurance, not where the stock is going next.
Where can I see volatility skew?
Most broker platforms show implied volatility next to each strike on the options chain, and many offer a skew or volatility-curve chart for one expiration. Compare strikes the same distance from the stock price within the same expiration.