# 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. Source: https://learn.tradelabsai.com/volatility/volatility-smile-and-skew/ Track: Volatility · Level: Advanced · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "Volatility Smile and Skew", https://learn.tradelabsai.com/volatility/volatility-smile-and-skew/ If the Black Scholes model were exactly right, every option on the same underlying and expiry would trade at the same implied volatility. In reality, implied volatility varies by strike. Plotted against strike, it often forms a "smile", higher at both ends, or a "skew" (also called a smirk), higher on one side. These shapes reveal how the market prices crash risk, rally risk and fat tails, and they matter for every option strategy that uses more than one strike. ## Typical shapes by market | Market | Typical shape | Why | |---|---|---| | Equity indices | Downward skew: low strike puts have much higher IV | Crash fear and demand for portfolio protection | | Single stocks | Skew, often less steep; can smile around events | Downside risk plus takeover upside | | Currencies | More symmetric smile; tilts toward the side traders fear | Both currencies can move sharply | | Commodities (e.g. crude oil, grains) | Often upward skew in supply shocks | Fear of price spikes | | Crypto | Varies; call skew in strong rallies, put skew in selloffs | Sentiment swings | *Figure: A typical equity index skew.* ## Why skew exists - **Fat tails:** real returns have more extreme moves than the lognormal distribution assumes, especially on the downside for stocks. Higher IV on far strikes corrects for this. See [Fat Tails](https://learn.tradelabsai.com/math/fat-tails/). - **Crash memory:** the steep equity skew became a lasting feature after the October 1987 crash. See [Black Monday 1987](https://learn.tradelabsai.com/history/black-monday-1987/). - **Volatility rises when prices fall:** for equities, falling prices usually bring higher volatility, so low strikes are priced with higher volatility. - **Supply and demand:** investors buy index puts for protection and sell calls for income (covered calls), pushing put IV up and call IV down. - **Leverage effect:** as stock prices fall, companies become more leveraged and riskier. ## Measuring skew | Measure | Definition | |---|---| | 25 delta risk reversal | IV of the 25 delta call minus IV of the 25 delta put | | 25 delta butterfly | Average IV of 25 delta call and put minus at the money IV (measures curvature) | | Put skew | IV of a 90% strike put minus at the money IV | | Cboe SKEW index | An index measuring tail risk priced into S&P 500 options | **Example: Reading a risk reversal** For one month S&P 500 options, the 25 delta put trades at 21% IV, the at the money option at 16% and the 25 delta call at 13%. The risk reversal is 13 minus 21 = minus 8 points, a strong put skew. The butterfly is (21 + 13) / 2 minus 16 = 1 point, a modest smile curvature. FX traders quote these two numbers along with at the money volatility to describe the whole smile. ## Skew and strategy | Strategy | Effect of steep put skew | |---|---| | Buying index puts for protection | Expensive | | Selling out of the money puts | Collects rich premium, but for real crash risk | | Put spreads | Selling the lower put recovers some skew premium | | Collars | The call sold is cheaper than the put bought | | Risk reversals | Directly trade the skew | See [Collars](https://learn.tradelabsai.com/options/collars/), [Bear Put Spread](https://learn.tradelabsai.com/options/bear-put-spread/) and [Skew Trading](https://learn.tradelabsai.com/volatility/skew-trading/). ## Sticky strike vs sticky delta When the underlying moves, how does the smile move? - **Sticky strike:** each strike keeps its implied volatility; at the money volatility changes as the price moves along the skew. - **Sticky delta (sticky moneyness):** the smile moves with the price, so options at the same moneyness keep the same volatility. Real markets fall somewhere in between and vary by regime. The assumption changes deltas and hedges, which is why models like SABR and local volatility differ. See [Volatility Surface Dynamics](https://learn.tradelabsai.com/volatility/volatility-surface-dynamics/). ## Common mistakes - **Assuming all strikes have the same IV.** - **Judging an option as cheap or expensive** by comparing its IV with at the money IV without accounting for normal skew. - **Forgetting skew changes** with market stress. ## Frequently asked questions ### What is the volatility smile? The pattern in which implied volatility is higher for options far from the current price than for at the money options, forming a curve shaped like a smile. ### Why do index puts have higher implied volatility? Because of crash risk, strong demand for portfolio protection and the tendency for volatility to rise when stock prices fall. ### What is a risk reversal in volatility terms? The difference between the implied volatility of an out of the money call and an equally out of the money put, often at 25 delta, used to measure skew. Next, see how smiles across expiries form the [Volatility Surface](https://learn.tradelabsai.com/volatility/volatility-surface/). ## Continue learning - Next lesson: [Volatility Surface](https://learn.tradelabsai.com/volatility/volatility-surface/) - Previous lesson: [The VIX](https://learn.tradelabsai.com/volatility/the-vix/) - Related: [The VIX](https://learn.tradelabsai.com/volatility/the-vix/): The VIX measures expected 30 day volatility of the S&P 500 from option prices. Learn how it is calculated, what levels mean, VIX futures and how traders use it. - Related: [Volatility Surface](https://learn.tradelabsai.com/volatility/volatility-surface/): The volatility surface maps implied volatility across every strike and expiry. Learn how it is built, what its shape says, how it is used and how it changes. - Related: [Skew Trading](https://learn.tradelabsai.com/volatility/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. - Related: [Implied Volatility (IV)](https://learn.tradelabsai.com/volatility/implied-volatility/): Implied volatility is the market's forecast of future movement, backed out from option prices. Learn how to read it, convert it to expected moves and use it. - Related: [Fat Tails](https://learn.tradelabsai.com/math/fat-tails/): Fat tails mean extreme market moves happen far more often than the normal curve predicts. Learn the evidence, the causes, how to measure them and how to manage them. - Related: [Local Volatility](https://learn.tradelabsai.com/options/local-volatility/): The local volatility model, from Dupire and Derman Kani, makes volatility depend on price and time so it fits every listed option. Learn how it works and its limits.