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.
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.
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.
Reflects bearish positioning — traders are paying up for downside protection. Counter-intuitively, can be bullish at extremes (everyone is hedged, room for upside surprise).
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.
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.