How Does the “Skew” of Implied Volatility Affect the Pricing of OTM Crypto Options?

The implied volatility "skew" refers to the phenomenon where options with different strike prices but the same expiration date have different implied volatilities. In crypto, there is often a "reverse skew" or "smirk," where OTM put options (lower strikes) have higher IV than ATM or OTM call options (higher strikes).

This indicates that the market is willing to pay more for downside protection, making OTM puts relatively more expensive. The skew directly affects the pricing of OTM options, making the risk-adjusted premium for selling OTM puts higher than a simple Black-Scholes model would suggest.