How Does Skew Affect the Pricing of Deep In-the-Money versus Deep Out-of-the-Money Options?

Volatility skew, often a "smirk" shape, indicates that out-of-the-money put options (lower strikes) have higher implied volatility than out-of-the-money call options (higher strikes). This means deep out-of-the-money put options are priced relatively higher than deep out-of-the-money call options.

The market is pricing in a higher risk of large, sudden downward movements (crashes) than upward movements. This pricing discrepancy is a direct reflection of investor demand for "tail risk" protection.