Volatility & advanced strategies
What causes the Volatility Skew (Smirk) where OTM puts trade at a structural premium to OTM calls?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
Volatility skew (smirk) occurs because OTM puts are priced with higher implied volatility than equidistant OTM calls, largely reflecting persistent demand for downside protection and the market's pricing of crash risk.
How it works
This pattern became especially pronounced in equity index options after the 1987 crash, as investors began pricing in a higher probability of sharp declines than the standard lognormal model implied.
An example
On a stock trading at $100, a 90-strike put might show 28% implied volatility while a 110-strike call shows only 18%, illustrating the downside skew.
Risk & limitations
Skew levels fluctuate with market sentiment and can invert or flatten during certain conditions, so assuming a fixed skew shape for all underlyings or time periods is inaccurate.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.