GlossaryAdvanced
Volatility Skew
The pattern where options at different strike prices on the same asset show different levels of implied volatility, rather than a single uniform value.
Volatility skew describes the pattern where options at different strike prices (see Kaavon's "Strike Price" glossary definition) on the same underlying asset and expiry show different levels of implied volatility (see Kaavon's "Implied Volatility" glossary definition), rather than all strikes pricing in a single, uniform volatility level.
The specific shape of a market's volatility skew is commonly read as reflecting the market's own expectations or hedging demand — for example, elevated implied volatility specifically on downside put options can reflect strong demand for crash protection.
Examples
- Elevated implied volatility specifically on downside put options is a common skew pattern, often reflecting strong demand for crash protection.
- Volatility skew means a single asset's options market doesn't price risk uniformly across every strike price, contrary to what a simple flat volatility assumption would imply.