Definition
Options Skew
Options skew is the pattern of implied volatility differing across strike prices, usually higher for out-of-the-money puts.
In a perfect world all strikes would share one implied volatility, but in reality out-of-the-money puts often carry higher IV than calls because investors pay up for downside protection — this is the volatility skew or smile. The shape of the skew reveals where the market sees the bigger risk.
Indian index options on Nifty and Bank Nifty typically show a put skew, reflecting persistent demand for crash protection. Traders read changes in skew as a sentiment signal and use it to choose which strikes to buy or sell, since a steep skew makes put-selling strategies relatively more attractive.
Related terms
- VegaVega measures how much an option's premium changes when implied volatility rises or falls by 1%.
- Option ChainAn option chain is the full table of all available call and put strikes for a contract, with their prices and data.
- Implied VolatilityImplied volatility (IV) is the market's forward-looking estimate of how much a stock or index will swing, backed out from current option prices and expressed as an annualised percentage.
- India VIXIndia VIX is the NSE's volatility index, measuring the market's expectation of Nifty volatility over the next 30 days — popularly called the 'fear gauge' because it spikes when investors turn anxious.
Plain-English explainer from Investdesk Investors Encyclopedia. General information, not financial advice.