IV Smile and Skew — Volatility Curve Across Strikes
IV isn't constant across strikes. The shape of the curve tells you about fear, complacency, and event positioning.
IV isn't constant across strikes. ATM strikes usually have the lowest IV; OTM strikes have higher IV. The shape of this curve — the 'IV smile' or 'skew' — tells you about market positioning beyond just the absolute IV level.
Reading the curve adds a dimension to chain analysis that single-strike IV can't capture.
What the curve shape tells you
Symmetric smile (OTM puts and OTM calls similarly elevated): uncertainty, no directional bias. Common in mid-regime.
Steep put skew (OTM puts much higher IV than OTM calls): fear of downside. Traders paying up for crash protection. Common before known event risk.
Steep call skew (OTM calls higher than OTM puts): rare in indices, more common in commodities or short-squeeze setups.
Flat skew: complacency. Often precedes IV expansion.
Trading the skew
Steep put skew makes bearish positioning expensive (puts are rich). Tactical move: sell put credit spreads instead of buying puts.
Flat skew makes long options unusually cheap. Tactical move: long straddles or strangles for IV expansion plays.
The change in skew matters more than its level. Skew steepening = fear growing. Skew flattening = fear subsiding.
Common misreads
- Looking at single-strike IV without checking skew. The same ATM IV can have very different smile shapes.
- Ignoring skew when sizing OTM positions. OTM puts in steep-skew markets cost much more than their direction warrants.
Key takeaways
- IV varies across strikes.
- Steep put skew = downside fear priced in.
- Steep call skew = upside squeeze positioning.
- Flat skew = complacency, often before vol expansion.
- Skew change matters more than skew level.
Skew patterns
Is steep put skew bullish or bearish?
Reflects bearish positioning — traders are paying up for downside protection. Counter-intuitively, can be bullish at extremes (everyone is hedged, room for upside surprise).
How do I see skew on the chain?
Look at the IV column across strikes. If 5%-OTM puts have IV 22% while 5%-OTM calls have IV 14%, that's an 8-point skew — steep.
Does skew matter for short-dated options?
Less than for monthly/quarterly. Weekly options have limited skew because of short time-to-expiry. Skew is most pronounced in 30-90 day options.