What is volatility skew?

Volatility skew is the difference in implied volatility — and therefore price — between out-of-the-money options and at-the-money options on the same asset. It reveals which tail the market pays most to hedge: put skew means downside protection is bid richer, call skew means upside protection is bid richer. It is often summarised by a 25-delta risk reversal.

Why do equities have put skew but crude oil has call skew?

Equities carry put skew because investors structurally pay up for crash insurance, making downside puts richer than upside calls. Crude oil often carries call skew because supply shocks — wars, OPEC cuts, sanctions — drive prices sharply higher, so the market fears the upside tail. The skew encodes which direction each asset's worst-case move points.

How is option skew measured?

Option skew is most commonly measured by a 25-delta risk reversal: the implied volatility of the 25-delta out-of-the-money call minus the implied volatility of the 25-delta out-of-the-money put. A positive number indicates call skew (richer upside); a negative number indicates put skew (richer downside). Desks quote it in vol points across tenors.

What does it mean when crude call skew and S&P put skew spike together?

A simultaneous spike in crude call skew and S&P put skew signals a single cross-asset tail being hedged: a supply or geopolitical shock that lifts oil upside while threatening equity downside. When EURUSD put skew joins, the market is pricing risk-off in the same narrative — often visible in the options surface before spot prices fully move.

How does skew differ from implied volatility level?

Implied volatility level is the overall price of optionality; skew is the asymmetry of that pricing across strikes. A surface can have flat overall vol but steep put skew, meaning crash insurance is expensive relative to upside calls even when general uncertainty is low. Level tells you how much vol costs; skew tells you which direction the fear points.

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Glossary

call skew / put skew

volatility skew · option skew · risk reversal · vol smile asymmetry

Call skew and put skew measure the relative implied volatility — and thus cost — of out-of-the-money options versus at-the-money on one side of an asset. Call skew prices upside protection richer; put skew prices downside protection richer, revealing which tail the market is paying most to hedge.

How it works

Skew is the implied-volatility difference between out-of-the-money and at-the-money strikes, often summarised by a 25-delta risk reversal (IV of the OTM call minus IV of the OTM put). Positive call skew means upside calls trade richer than equidistant puts; positive put skew is the reverse. Equities structurally carry put skew (crash insurance); commodities like crude often carry call skew (supply-shock upside).

Why it matters now

In 2025–2026 a simultaneous spike in crude call skew, S&P put skew and EURUSD put skew signals a single cross-asset risk: markets pricing an energy/geopolitical supply shock that lifts oil upside while threatening equity and risk-currency downside. Watching these wings move in unison flags correlated tail hedging ahead of spot.

Example

In the days after a Middle East escalation, a desk might see Brent 25-delta call skew jump from ~2 vol points to ~6, while S&P 500 three-month 25-delta put skew widens and EURUSD put skew steepens — three different surfaces all bidding the same supply-shock narrative. The dislocation showed in the options surface before spot fully repriced.

Mechanism

25Δ risk reversal = IV(25Δ call) − IV(25Δ put); call skew > 0, put skew < 0

How desks use it

Detect cross-asset tail hedging by tracking risk reversals move in unison ahead of spot
Gauge whether the market fears upside (commodities) or downside (equities) more
Price relative value between put wings and call wings on a vol surface

Frequently asked

What is volatility skew?: Volatility skew is the difference in implied volatility — and therefore price — between out-of-the-money options and at-the-money options on the same asset. It reveals which tail the market pays most to hedge: put skew means downside protection is bid richer, call skew means upside protection is bid richer. It is often summarised by a 25-delta risk reversal.
Why do equities have put skew but crude oil has call skew?: Equities carry put skew because investors structurally pay up for crash insurance, making downside puts richer than upside calls. Crude oil often carries call skew because supply shocks — wars, OPEC cuts, sanctions — drive prices sharply higher, so the market fears the upside tail. The skew encodes which direction each asset's worst-case move points.
How is option skew measured?: Option skew is most commonly measured by a 25-delta risk reversal: the implied volatility of the 25-delta out-of-the-money call minus the implied volatility of the 25-delta out-of-the-money put. A positive number indicates call skew (richer upside); a negative number indicates put skew (richer downside). Desks quote it in vol points across tenors.
What does it mean when crude call skew and S&P put skew spike together?: A simultaneous spike in crude call skew and S&P put skew signals a single cross-asset tail being hedged: a supply or geopolitical shock that lifts oil upside while threatening equity downside. When EURUSD put skew joins, the market is pricing risk-off in the same narrative — often visible in the options surface before spot prices fully move.
How does skew differ from implied volatility level?: Implied volatility level is the overall price of optionality; skew is the asymmetry of that pricing across strikes. A surface can have flat overall vol but steep put skew, meaning crash insurance is expensive relative to upside calls even when general uncertainty is low. Level tells you how much vol costs; skew tells you which direction the fear points.

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