What Is a “Volatility Skew” and What Does It Indicate?

Volatility skew, or volatility smile, is the empirical observation that implied volatility is not constant across all strike prices for options with the same expiration date. A common skew is when OTM put options have higher IV than ATM options, and OTM call options have lower IV.

This indicates that the market perceives a higher risk of a sharp price drop (left tail risk) than a sharp price increase, reflecting a persistent demand for downside protection.