Volatility Skew

Q: Why do out-of-the-money puts have higher implied volatility than calls?

Because markets fall faster than they rise and investors hold mostly long portfolios, so demand for downside protection is persistent while demand for upside is not. Writers of far puts also demand extra premium for crash risk. The result is a skew: implied volatility rises as strikes move below the market and falls, or flattens, as they move above it.

Q: How is skew measured?

Most simply as the difference in implied volatility between an out-of-the-money put and an out-of-the-money call the same distance from the money, often at 25-delta: a 25-delta risk reversal. A reading of +4 means the put trades 4 volatility points above the call. Traders also look at the IV of a put a fixed percentage below spot against the at-the-money IV.

Q: What does a steepening skew mean?

That demand for downside protection is rising faster than for upside: put IV is climbing relative to call IV. It usually accompanies nervousness ahead of events or after a sharp drop, and it makes put spreads cheaper and call spreads dearer in relative terms. A flattening skew means fear is draining out.

Q: Is skew the same as the volatility smile?

The smile is the full curve of IV against strike for one expiry; skew is its tilt. Index options show a lopsided smile that leans toward puts, so the terms are used almost interchangeably for Nifty. Commodity and currency options can show a more symmetric smile, with both wings elevated.

Implied volatility is not one number per expiry. It is a curve across strikes, and its tilt is a direct reading of what the market is afraid of.

In short: volatility skew is the way implied volatility differs across strikes of the same expiry. On index options such as Nifty it slopes downward from left to right: out-of-the-money puts carry higher implied volatility than at-the-money options, and out-of-the-money calls carry lower. The slope measures the price the market is putting on a fall relative to a rise, and it moves with fear.

The intuition

If the Black-Scholes world were exactly right, every strike on an expiry would trade at the same implied volatility, because there is only one underlying and one future distribution of its price. In practice the market knows two things the model does not: that index falls are sharper than rallies, and that most participants own stocks and want insurance against a drop. Both push up the price of puts below the market. Expressed as implied volatility, that extra price shows up as higher IV at lower strikes: the skew.

The upside is the mirror image with less force. Calls far above the market are sold by investors overwriting their holdings and bought by fewer people, so their IV sits at or below the at-the-money level. The whole curve has been described as a smirk rather than a smile for index options, and that is the picture every Nifty chain shows.

Formula and measures

25-delta risk reversal = IV of the 25-delta put − IV of the 25-delta call (same expiry). Positive for an index with normal put skew.

Fixed-strike skew = IV of the put 5% below spot − at-the-money IV, or the slope of IV per 1% of strike.

Each is a point-in-time number that is compared with its own recent history; a risk reversal of 3 volatility points is ordinary in a calm Nifty, 6 or more signals stress.

Worked example (illustrative numbers)

Suppose NIFTY is at 24,000 with two weeks to the monthly expiry, and the chain shows these implied volatilities:

Strike	Type	Distance	Implied volatility
22,800	put	−5%	19.5%
23,400	put	−2.5%	16.5%
24,000	at the money	0	14.0%
24,600	call	+2.5%	12.8%
25,200	call	+5%	12.2%

The put 5% below spot trades 5.5 volatility points above the money; the call 5% above trades 1.8 points below. A 25-delta risk reversal here is roughly 16.5 − 12.8 ≈ +3.7 points. In premium terms, the 23,400 put and the 24,600 call are the same distance from spot, but the put costs noticeably more because it is priced at 16.5% rather than 12.8%: the market is charging extra for the direction it fears.

Now suppose a global sell-off hits and Nifty falls 2% while the chain reprices: at-the-money IV goes to 17%, the 5%-below put to 25%, the 5%-above call to 14%. The whole curve has lifted, but the put side has lifted most, so the skew has steepened from 5.5 to 8 points. A trader who was short that put has lost on delta, on vega and on skew all at once.

Two states of the same expiry's skew. Stress lifts the whole curve and tilts it further toward the puts.

Why it matters to an options trader

It prices every spread. A put spread sells the higher-IV lower strike against the bought higher strike, so it is cheaper than a naive single-IV model suggests; a call spread is the reverse. Knowing the skew tells you which structures are rich and which are cheap.
It is a sentiment gauge independent of price. Skew can steepen while the index is flat, which says protection is being bought quietly. Read alongside PCR and India VIX, it completes the picture of positioning.
It is a risk in its own right. A position that is delta-neutral and vega-neutral can still lose when skew steepens, because its puts reprice faster than its calls. Risk reversals and ratio spreads carry skew exposure deliberately.
It explains why "cheap" far calls stay cheap. Low IV on upside strikes is structural; it is not an inefficiency waiting to be bought.

Common mistakes

Pricing all strikes at the at-the-money IV. A calculator run at one volatility misprices every out-of-the-money option; use each strike's own IV from the chain.
Treating high put IV as "puts are overpriced". The skew has persisted for decades because the risk it prices is real; selling far puts for the "extra" premium is a crash-risk trade.
Comparing skew across expiries without adjusting. Skew is steeper in near expiries and flatter further out; compare each expiry with its own history.
Reading a single day's skew in isolation. The level matters less than the change: a steepening into an event, or a sudden flattening after one, is the signal.

Indian-market specifics

Nifty and Bank Nifty show a persistent put skew, as most equity indices do; Bank Nifty's is usually steeper, reflecting its higher volatility and the sector's sensitivity to rates and credit news.
Nifty's weekly Tuesday expiry means the nearest chain's skew is dominated by the next few sessions' risk; the monthly chain, which is what India VIX is built from, is the one to read for broader positioning.
Scheduled events, the Union Budget, RBI days and election results, steepen Nifty skew in advance and flatten it after.
MCX commodity options, such as crude oil and gold, can show a more symmetric smile or even call skew, since supply shocks push those prices up rather than down.

FAQ

Why do out-of-the-money puts have higher implied volatility than calls?

Persistent demand for downside protection and the asymmetry of market falls.

How is skew measured?

With a risk reversal, the IV gap between equidistant puts and calls, or the IV of a fixed-percentage put against the at-the-money level.

What does a steepening skew mean?

Protection is being bid; fear is rising relative to greed.

Is skew the same as the volatility smile?

The smile is the whole curve; skew is its tilt. For index options the two describe the same lopsided shape.

IV by strike, from the latest close

The option-chain pages show implied volatility for every strike, so the skew is visible at a glance. In the app, the Volatility screen adds the term structure and the volatility cone, and Market Predictions reads IV skew as one of its inputs.

Nifty option chain IV today

Related terms

Implied Volatility (IV)
Volatility Term Structure, IV across expiries rather than strikes
India VIX
Vega