What Is a Volatility Skew in Options Trading?

A volatility skew, or volatility smile, is the phenomenon where options with the same expiration date but different strike prices have different implied volatilities. The Black-Scholes model assumes a single implied volatility for all strikes.

In reality, out-of-the-money puts (lower strikes) often have higher implied volatility than at-the-money options, creating a "skew." This reflects market perception of a higher probability for extreme downward movements.