Volatility smile and skew: compare strikes on one chain
Different strikes can imply different volatilities. Read the curve as a description of option prices and tail exposure.
By OptionsKing. Publisher and editorial methods.
What you will learn
By the end of this lesson, you should be able to:
- Read IV across a fixed expiry.
- Distinguish smile and skew shapes.
- Explain why higher wing IV is not free profit.
Hold the expiry fixed and compare IV across strikes. A flat-volatility model cannot reproduce every market quote with one input, so the inferred curve bends. Use the Nike chain to identify the shape, then distinguish possible explanations from proof that any strike is mispriced.
The curve on one real chain
Nike, June 3, spot $74.20, the July 18 expiry at 45 days out.
| Strike | Type | Delta | Implied vol | Credit |
|---|---|---|---|---|
| $65 | put | 0.17 | 44.5% | $112 |
| $67.50 | put | 0.23 | 42.0% | $154 |
| $70 | put | 0.30 | 40.1% | $216 |
| $74 | at the money | 0.45 | 37.0% | $354 |
| $78 | call | 0.38 | 35.0% | $226 |
| $80 | call | 0.30 | 34.0% | $158 |
| $84 | call | 0.17 | 33.2% | $74 |
Read the volatility column top to bottom. It falls the whole way, 44.5 down to 33.2, monotonically. That is the skew, and it is eleven and a half volatility points wide on an ordinary large-cap on an ordinary Tuesday.
A smile would be a U: high on both wings, low in the middle. Equities often show downside skew, although individual names can have other shapes. This example shows a downhill slide with a slight upturn at the far right that is usually too small to see. The nickname is the smirk, and it fits.
Where the shape comes from
Three explanations, all partly true, none of them complete on their own.
The distribution has a fat left tail. Black-Scholes assumes lognormal returns, which means no crashes. Stocks crash. A model that cannot represent a 20 percent gap down has to be fed a higher volatility at low strikes to produce the prices those contracts actually trade at. The skew is the market patching the model's missing tail using the only dial the model exposes.
Stocks fall faster than they rise. Volatility and price are negatively correlated in equities. Rallies grind and declines gap, and a market that knows this prices downside strikes as though the volatility will be higher by the time you get there, because historically it is.
Somebody has to hold the other side of everybody's hedge. This is the least theoretical and probably the largest. There is enormous one-directional demand for downside protection from institutions who are not price-sensitive, and comparatively little natural supply. Meanwhile upside calls have a steady seller in every covered-call program on earth. Persistent demand on one wing and persistent supply on the other bends the curve, and it stays bent.
1987 is when it appeared
Before October 1987, S&P 500 index options traded with a curve close to flat, and the mild shape they did have looked more like a symmetric smile than a slide. The crash is a historical reference for pronounced index downside skew. Modern surfaces vary by underlying and expiry; one historical event does not establish a permanent universal shape.
Skew is inferred from current option prices, not determined by history alone. Demand for protection, supply, risk compensation and perceived tail exposure all contribute. Inspect the actual surface for the underlying and expiration rather than assuming every equity chain has the same shape.
Where you actually see smiles
Currencies. A big move in either direction on a currency pair is a big move for somebody, and there is hedging demand on both wings, so the curve comes out roughly symmetric. Commodities often smile too, sometimes tilted the other way, because a supply shock in oil is an upside event.
Single-stock equities smirk. Equity indices smirk harder, because index puts are the instrument the entire institutional world reaches for at once.
What it means for you
Skew compares strikes, not the call and put at one identical strike under the same model. A single headline IV therefore omits information. When comparing candidates, keep expiry, strike or delta, model and quote convention visible.
Two things, immediately.
First, "Nike's IV is 37 percent" is a shorthand for the at-the-money contract, not a property of the stock. Any conversation about a stock's IV that does not name a strike and an expiry is missing two thirds of its inputs.
Second, and this is the part with money in it: as a premium seller running covered calls, cash-secured puts or the wheel, you are structurally short both wings, and they are not priced alike. Your calls sell into the low corner of the curve and your puts sell into the high corner. That asymmetry is worth real dollars per contract, and it is the subject of the next page.
Check your understanding
Why can an at-the-money IV miss the exposure on a downside put?
Show the explanation
The downside strike may carry a substantially higher implied volatility and price different tail exposure. Use the actual contract's quote and IV rather than applying the at-the-money number to every strike.
Common questions
What is the volatility smile?
The pattern you get when you plot implied volatility against strike price for one expiry. If out-of-the-money options on both sides carry higher volatility than at-the-money ones, the curve is U-shaped and gets called a smile.
Why do equity options skew instead of smile?
Equity downside skew commonly reflects asymmetric crash exposure and hedging demand. Upward jumps also occur, and other markets or conditions can produce different shapes.
When did the volatility skew appear?
The 1987 crash is an important historical reference for pronounced equity-index downside skew. It does not establish a permanent, unchanging shape for every underlying and expiry.
Does the skew mean out-of-the-money puts are overpriced?
Not automatically. They are priced for a risk that is genuinely larger than a lognormal model admits. The extra premium is partly compensation you earn and partly an insurance markup you collect, and separating the two is the hard part of selling them.
Sources
Rules and thresholds above were checked against these documents on August 4, 2026. Exchange and broker rules change. Confirm anything you are about to act on with your own broker.
Keep reading
Do the math on your own trade
Every price in this article is an illustrative worked example, not a quote. Read Volatility for the rest of the series, and the disclaimer before you act on any of it. Selling options carries real risk of loss, and the loss can be far larger than the premium you collected.