# Skew Trading > Skew trading bets on changes in the implied volatility difference between strikes. Learn risk reversals, put spread structures, what drives skew and the risks. Source: https://learn.tradelabsai.com/volatility/skew-trading/ Track: Volatility · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Skew Trading", https://learn.tradelabsai.com/volatility/skew-trading/ Skew trading focuses on the relative pricing of options at different strikes rather than the overall level of volatility. A skew trader asks: are out of the money puts too expensive compared with calls? Is the curve too steep or too flat compared with history and with likely future moves? Trades are built to profit if the skew steepens or flattens, usually with limited exposure to the general level of volatility and to direction. ## Measuring skew | Measure | Definition | Lesson | |---|---|---| | 25 delta risk reversal | 25 delta call IV minus 25 delta put IV | [Volatility Smile and Skew](https://learn.tradelabsai.com/volatility/volatility-smile-and-skew/) | | Put skew | 90% strike put IV minus at the money IV | | | Skew slope | IV change per 1% change in strike | | | Cboe SKEW index | Tail risk priced into S&P 500 options | | Traders compare current skew with its history, with realised behaviour (how often large down moves actually happened) and with other markets. ## What drives skew - **Demand for protection:** more hedging demand steepens put skew. - **Supply from overwriting:** covered call selling cheapens upside calls. See [Covered Call](https://learn.tradelabsai.com/options/covered-call/). - **Market moves:** skew usually steepens as markets fall and volatility rises, though in very sharp crashes at the money volatility can jump so much that measured skew flattens. - **Events and takeovers:** single stocks with takeover potential may see call skew rise. - **Commodity supply shocks:** upside call skew in oil or grains when supply is threatened. ## The main skew trades ### Risk reversal Buy an out of the money call and sell an out of the money put (or the reverse), both delta hedged. See [Synthetic Positions](https://learn.tradelabsai.com/options/synthetic-positions/). **Example: Selling expensive put skew** An index trades at 5,000. One month 25 delta puts trade at 22% IV and 25 delta calls at 14%, a risk reversal of minus 8 points, steeper than the one year average of minus 6. A trader sells the 25 delta put and buys the 25 delta call, then sells index futures to hedge the combined delta. If the skew normalises to minus 6 without a big move, the trade profits from the relative repricing. If the market sells off sharply, the short put loses heavily, and skew may steepen further. The trade is effectively long the market's upside and short its tail risk. ### Put spreads and ratio spreads - **Buying a put spread** (long higher strike, short lower strike) sells the expensive far put to finance a nearer one. See [Bear Put Spread](https://learn.tradelabsai.com/options/bear-put-spread/). - **Put ratio spreads** sell more far out of the money puts than they buy, harvesting steep skew with crash risk. See [Ratio Spreads](https://learn.tradelabsai.com/options/ratio-spreads/). - **Put backspreads** buy more far puts than they sell, betting skew will steepen and crashes are underpriced. ### Butterflies and wings Trades on curvature: buying or selling the wings (far strikes on both sides) against the at the money option, often expressed through the 25 delta butterfly. ## Skew and direction Skew trades rarely remain direction neutral. As the underlying moves, strikes move closer to or further from the money, and deltas and vegas change. Short skew positions resemble short crash insurance and lose when markets fall quickly. Hedging delta frequently and modelling how the smile moves with price are essential. See [Volatility Surface Dynamics](https://learn.tradelabsai.com/volatility/volatility-surface-dynamics/). ## Skew across markets | Market | Typical skew | Skew trade ideas | |---|---|---| | Equity indices | Steep put skew | Sell rich puts against calls; buy cheap upside | | Single stocks | Flatter, event driven | Compare with index skew; dispersion | | FX | Depends on pair and risk sentiment | Risk reversals on safe haven currencies | | Commodities | Call skew in supply scares | Sell upside calls after spikes | | Crypto | Swings between call and put skew | Trade sentiment extremes | ## Risks - **Tail events:** short skew can lose many times its expected profit in a crash. - **Model risk:** measured skew depends on the volatility model and interpolation. - **Liquidity:** far out of the money options can have wide spreads. - **Dynamics:** skew can stay extreme for long periods. ## Frequently asked questions ### What is skew trading? Trading the relative implied volatility of options at different strikes, aiming to profit if the skew steepens or flattens. ### What is a risk reversal trade? Buying an out of the money call and selling an out of the money put, or vice versa, often delta hedged, to take a view on skew. ### Why is index put skew so steep? Because of strong demand for crash protection, the tendency of volatility to rise when markets fall and the memory of past crashes such as 1987. Next, trade the time dimension in [Term Structure Trading](https://learn.tradelabsai.com/volatility/term-structure-trading/). ## Continue learning - Next lesson: [Term Structure Trading](https://learn.tradelabsai.com/volatility/term-structure-trading/) - Previous lesson: [Volatility Crush and Expansion](https://learn.tradelabsai.com/volatility/volatility-crush-and-expansion/) - Related: [Volatility Crush and Expansion](https://learn.tradelabsai.com/volatility/volatility-crush-and-expansion/): Implied volatility tends to rise before events and collapse after them. Learn why volatility crush happens, how to measure it and how to trade options around events. - Related: [Volatility Smile and Skew](https://learn.tradelabsai.com/volatility/volatility-smile-and-skew/): Implied volatility differs by strike, forming a smile or skew. Learn the shapes in equities, FX and commodities, why they exist and how to measure skew. - Related: [Synthetic Positions](https://learn.tradelabsai.com/options/synthetic-positions/): Synthetic positions combine options and the underlying to copy another position's payoff. Learn synthetic stock, calls and puts, and why traders use them. - Related: [Ratio Spreads](https://learn.tradelabsai.com/options/ratio-spreads/): Ratio spreads buy and sell different numbers of options at different strikes. Learn front ratios, backspreads, payoffs, uses and the risk of the extra short options. - Related: [Collars](https://learn.tradelabsai.com/options/collars/): A collar holds shares, buys a protective put and sells a call to fund it. Learn the payoff, zero cost collars, strike choices and who uses this hedge. - Related: [Volatility Surface Dynamics](https://learn.tradelabsai.com/volatility/volatility-surface-dynamics/): Surface dynamics describe how implied volatilities change when the underlying moves. Learn sticky strike, sticky delta and why hedges depend on them.