What Is the Volatility Skew in Options Pricing?

Volatility skew, or smile, is the phenomenon where options with the same expiration date but different strike prices have different implied volatilities. Typically, out-of-the-money (OTM) put options (lower strikes) have higher implied volatility than OTM call options (higher strikes) or at-the-money options.

This reflects the market's perception of higher risk for a large downward move (a "crash").