What Is the “Volatility Skew” and What Does It Imply about Market Expectations?

The volatility skew (or smile) is the phenomenon where options with the same expiration date but different strike prices have different implied volatilities. Specifically, in equity markets, out-of-the-money put options (lower strikes) often have higher implied volatility than at-the-money or out-of-the-money call options (higher strikes).

This skew implies a market expectation that large, sudden downward movements in the underlying asset are more likely than upward movements, reflecting a persistent demand for downside protection.