Volatility skew describes how implied volatility changes across strikes for a single expiry. On equity indices, downside puts trade at higher implied volatility than at-the-money options, and upside calls at lower levels. Plotted against strike, the curve slopes down from left to right.
How it works
Two forces drive equity skew. Investors pay up for downside protection, and spot and volatility are negatively correlated: when the index falls, realised and implied volatility tend to rise, so low strikes deserve a higher vol. In FX and commodities the curve can be more symmetric, which is why traders there speak of a smile. Skew is measured in several ways: the difference between the 90% and 110% strike vols, the 25-delta risk reversal, or the slope in vol points per 10% of moneyness.
Example
Hypothetical one-month index options: the 90% strike put trades at 24% implied volatility, the at-the-money strike at 18% and the 110% call at 15%. The 90/110 skew is 24 − 15 = 9 vol points. Relative to the at-the-money level, the 90% put carries a 6-point premium.
On the desk
Skew does not stay still when spot moves. Whether the surface behaves sticky-strike or sticky-moneyness changes the effective delta of a position. A skew that looks steeper may also just reflect at-the-money vol falling while the wings stay put.
Educational definition. Worked examples are hypothetical. Not an offer or a recommendation.