Volatility Skew

Volatility skew is the pattern of implied volatility differing across strikes of the same expiration. In equity indices like the S&P 500, downside puts almost always trade at higher IV than upside calls, reflecting persistent demand for crash protection. Changes in the skew's steepness are read as shifts in hedging demand.

If option markets priced all strikes with one volatility, the IV curve across strikes would be flat. Instead, index options show a persistent tilt: the further below spot a put strike sits, the higher its IV. Two forces sustain this - institutional demand for downside protection, and the empirical tendency of volatility to rise when markets fall.

The skew's shape is informative. A steepening skew means downside protection is being bid relative to at-the-money - hedging urgency is rising even if spot is calm. A flattening skew, or an unusual bid in upside calls, marks reduced fear or a chase for upside exposure - a signature of melt-up conditions.

Like all positioning reads, skew describes demand and pricing, not destiny: a steep skew is the market paying up for insurance, which is context about positioning rather than a prediction that the insured event will occur.