Volatility

Implied volatility skew: why puts cost more than calls

Skew is the difference in implied volatility between strikes at the same expiry. On equity indices, puts below the money trade at higher implied vol than calls the same distance above, which is the skew.

The smile and the skew

If Black-Scholes were literally true, every strike of an expiry would imply the same volatility. Plot implied vol against strike and you'd get a flat line. Real markets give a curve: the smile. On equity indices it's lopsided, high on the put side and lower on the call side, and that lopsidedness is the skew.

Why index puts are expensive

Crash risk: indices fall faster than they rise, and investors pay for protection.
Spot and vol move together: volatility tends to rise when the index falls, so downside strikes are worth more.
Supply and demand: portfolio hedgers buy puts; overwriters sell calls.

Measuring it

A common measure is the 25-delta risk reversal: call IV minus put IV at the strikes with delta 0.25 and −0.25. Negative means puts are richer. Zanshin Flow measures put-side minus call-side IV one expected move from spot and tracks it through the session, beside an earlier smile for comparison.

Reading changes

Put skew rising while price is flat suggests protection is being bid; put skew falling while price rises suggests complacency. Read it as context about positioning, not as a timing signal.

NDX skew smile, skew through the session and the level heatmap in Zanshin Flow — The NDX smile and how skew moved through the session.

Questions

What is volatility skew?

The pattern of different implied volatilities across strikes of the same expiry. On equity indices out-of-the-money puts trade at higher implied volatility than out-of-the-money calls.

What is a risk reversal?

The implied volatility of an out-of-the-money call minus that of an equally out-of-the-money put, commonly at 25 delta. It's a standard single-number measure of skew.

Why is there a volatility smile?

Because real returns have fatter tails than the normal distribution Black-Scholes assumes, and because demand for protection and the link between falling prices and rising volatility make wing options worth more.

Not financial advice. This article explains how options and dealer hedging work. It is not a recommendation to buy or sell anything.