What is Vol Skew?
Vol skew is the structural difference in implied volatility across strikes at a given expiry — typically higher for downside strikes on equity indices, reflecting the bid for crash protection.
Definition
Vol skew refers to the shape of the implied vol curve across strikes for a single expiry. On equity indices like SPX, the canonical pattern is a "smirk": OTM puts trade at materially higher implied vol than ATM, which trade higher than OTM calls. This is the market's way of pricing the fact that index returns are not normal — they have a fat left tail (crashes are more likely than a normal distribution suggests) and a thin right tail. The downside skew is essentially the price of crash insurance. On FX, the skew is typically more symmetric — closer to a "smile" — because both currencies in the pair can move. On single stocks, you sometimes see "reverse skew" (calls more expensive than puts) on heavily shorted names ahead of earnings.
Why it matters & how it's calculated
Skew is quantified several ways on a desk. The "25-delta risk reversal" — IV of 25-delta call minus IV of 25-delta put — is the FX-style standard. Equity desks often quote "90-110 skew" (the IV difference between 90-strike and 110-strike, normalised by spot) or "SDEX" (Skewness Adjusted Delta-Equivalent eXposure) -style normalised measures. The slope of the smile at-the-money is the "ATM skew" — a number that drives the difference between BS delta and "minimum-variance delta." Skew has its own dynamics: in calm markets, equity skew is flatter; in stressed markets, skew steepens (downside vol bid up). Skew also follows spot — when SPX rallies, the entire surface tends to slide left (downside strikes that were 95% of spot are now 93% of spot, and the new 95% strike comes from where the old ATM was) producing what desks call "sticky-strike," "sticky-delta," or "sticky-moneyness" dynamics depending on the regime. The choice of sticky rule has enormous P&L consequences for delta-hedged books.
Worked example
3-month SPX vol surface: ATM IV at 16%, 25-delta put IV at 21% (5-point downside skew), 25-delta call IV at 14% (2-point call premium below ATM). This is a typical "downside-skewed" surface. A trader selling a 25-delta put collects 21 vol of premium, while one selling a 25-delta call collects only 14 — the asymmetry is the crash-insurance premium.
Related concepts
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