What is vol skew?

Vol skew (also called volatility skew, smile, or smirk) is the shape of implied volatility plotted against option strike or delta. In equities, the standard pattern is downside skew: out-of-the-money puts trade at higher IV than out-of-the-money calls, reflecting the market's fear that stocks fall faster than they rise. The workhorse metric is Risk Reversal 25Δ = IV(25Δ put) − IV(25Δ call).

Calculation type: IV extraction across delta band Method version: 1.0 Date reviewed: 2026-07-04 Live scanner: /skew/

Formula

Vol skew is measured via several standard metrics:

Risk Reversal 25Δ (workhorse)

RR25 = IV(25Δ put) − IV(25Δ call)

Positive = downside skew (typical). Negative = upside skew. SPY 25Δ RR typically runs +2 to +6 vol points in normal markets, spiking to +10-15 during panics, dropping toward zero or negative during euphoric rallies.

Put Skew (25Δ − ATM)

Put Skew = IV(25Δ put) − IV(50Δ ATM)

How much extra vol premium the market prices into OTM puts vs ATM. Positive in equities. Larger positive = steeper downside skew.

Call Skew (25Δ − ATM)

Call Skew = IV(25Δ call) − IV(50Δ ATM)

Usually negative in equities (OTM calls are cheaper than ATM). Positive call skew signals upside interest, common in meme regimes.

Slope (regression)

Some vol traders fit a linear regression of IV on delta and use the slope coefficient as the skew metric. Advantage: uses all data points, not just 25Δ. Disadvantage: masks nonlinearities.

Worked example

SPY at spot = $520, 30 DTE expiration. Observed IVs:

10Δ put (strike ~$485): 21.5%
25Δ put (strike ~$510): 17.3%
50Δ put (ATM $520): 15.2%
50Δ call (ATM $520): 15.2% (put-call parity)
25Δ call (strike ~$530): 13.8%
10Δ call (strike ~$545): 13.1%

Compute the skew metrics

RR25 = 17.3% − 13.8% = +3.5 vol points (downside skew)
Put Skew = 17.3% − 15.2% = +2.1 vol points
Call Skew = 13.8% − 15.2% = −1.4 vol points
Total Skew (10Δ put − 10Δ call) = 21.5% − 13.1% = +8.4 vol points

Interpretation: This is a healthy positive downside-skew regime. RR25 at +3.5 vol points is in the normal SPY range. Put wing (17.3% at 25Δ) is meaningfully elevated over ATM; call wing (13.8% at 25Δ) is below ATM. The market is pricing more fear on the downside than opportunity on the upside — standard equity behavior.

Now compare to a hypothetical SPY panic day: same spot but 10Δ put IV = 42%, 25Δ put IV = 28%, ATM = 22%, 25Δ call IV = 18%, 10Δ call IV = 16%. RR25 = 28% − 18% = +10 vol points. Much steeper. That's the shape you see during Aug 2015, Feb 2018, Mar 2020.

Downside vs upside skew regimes

Downside skew (typical equities)

OTM puts have higher IV than OTM calls. RR25 > 0.

Why it exists: Stocks crash faster than they rally. Big buyers of downside protection (pension funds, insurance companies). Volatility is empirically negatively correlated with returns in equities.

Trade implication: Selling OTM puts systematically over-collects premium relative to realized moves. Buying OTM puts is expensive protection.

Upside skew (rare)

OTM calls have higher IV than OTM puts. RR25 < 0.

Why it exists: Momentum/meme regimes where retail FOMO drives call demand. Squeeze plays (GME, AMC). Some cryptos (COIN, MSTR historically).

Trade implication: Selling OTM calls over-collects. Ratio spreads and covered-call strategies benefit.

How to use skew in trading

For CSP sellers

Higher put skew = richer premium on cash-secured puts. But it also means the market expects more downside than usual. Consider position-sizing conservatively when RR25 spikes above +8 vol points on SPY.

For CC sellers

Downside skew means OTM calls are relatively cheap. Selling OTM calls in normal-skew regimes underperforms selling ATM calls in vol terms. Consider staying closer to ATM when RR25 is elevated.

For iron condor traders

In steep-skew regimes, the natural condor width is asymmetric: put wing wider than call wing. Symmetric strikes leave alpha on the table because you're not adjusting for the higher put IV.

For skew-trading pros

Vertical spreads (put debit spreads vs call debit spreads) can be structured to be neutral on ATM IV but express a view on skew steepness. Advanced strategy; requires a sound base in Greeks.

Common misconceptions

"Positive skew means the stock will fall"

No. Skew measures the market's pricing of downside vs upside vol, not its forecast of direction. Positive skew is the normal state for equities regardless of directional expectations.

"Vol smile and skew are the same thing"

Related but distinct. A "smile" is a symmetric U-shape (both wings elevated, ATM low) — typical in currency and rates markets. A "skew" or "smirk" is asymmetric (one wing elevated, other flat) — typical in equities. Vol smiles and skews are two shape patterns; the underlying methodology (extracting IV across strikes) is the same.

"Skew is stable"

No. Skew shifts intraday and dramatically around events. Pre-earnings, skew often steepens as put demand rises. Post-earnings, skew typically flattens because uncertainty resolved.

"You can't trade skew directly"

Actually you can. Risk reversal trades (long OTM put + short OTM call, or vice versa) directly express a view on skew steepness. So do ratio spreads. Sophisticated retail traders and vol funds have specific skew-trading strategies.

Related terms and tools

Live Vol Skew scanner — per-ticker skew curve with risk-reversal metrics.
IV Term Structure — the time dimension of the vol surface.
IV Rank — vol level metric complementary to skew shape.
Expected Move — ATM straddle envelope.
Gamma Exposure — dealer positioning that shapes skew via hedging flow.
Vega — the vol-sensitivity Greek.

Sources: tastytrade skew primer, Hull "Options, Futures and Other Derivatives" (Chapter 20, volatility smiles). Educational only — see the full disclaimer. Page last reviewed 2026-07-04.