How Does the Concept of “Skewness” in the Implied Volatility Surface Affect the Mid-Price Calculation?
Skewness in the implied volatility (IV) surface means that options with the same expiration but different strike prices have different IVs. Since IV is an input to the option pricing model (like BSM), the model-derived fair value (mid-price) will be higher for options with higher IV.
Therefore, the skew causes the mid-price of OTM puts to be relatively higher than OTM calls, reflecting the market's higher perceived risk of a downside move.
