> For the complete documentation index, see [llms.txt](https://guide.laevitas.ch/llms.txt). Markdown versions of documentation pages are available by appending `.md` to page URLs; this page is available as [Markdown](https://guide.laevitas.ch/concepts/volatility-skew.md).

# Volatility Skew

{% hint style="info" %}
The Volatility Skew is a pattern of implied volatility for options that have the same underlying, the same expiration date but different strike prices.
{% endhint %}

### What is Volatility Skew

Different strikes of the same expiration often trade at different implied volatilities, depending on market conditions. 

The Volatility Skew pattern can be observed by plotting implied volatilities against strike prices.

### Different Skew Patterns

The Black-Scholes Model (BSM) predicts that the implied volatility curve is flat when plotted against varying strike prices. 

Theoretically, it would be expected that the implied volatility would be the same for all options expiring on the same date with the same underlying asset, regardless of the strike price. 

Yet, in the real world, this is not the case.

Skew occurs when there is imbalance in demand for options that are in-the-money or out-of-the-money as opposed to those at-the-money. 

### No Skew

![](/files/qMfCW7ukGqbvziQLzA1j)

When there is no skew, the Implied Volatility forms a "smile" pattern with the shape that it makes, indicating that out-of-the-money Puts and Calls are more volatile and "expensive" than at-the-money options.

The high demand for options that are further in-the-money (ITM) or out-of-the-money (OTM) are be reflected in higher implied volatility at the far left and far right of the curve.

A Volatility "Smile" implies that the market are betting on big moves in the underlying asset.

### Normal/ Reverse Skew

![](/files/U7wgIE3ohYDRpehtHSIf)

Generally Normal or Reverse Skew is the base case for a normal performing market where traders are expecting a stock to fall (or at least there is a heightened risk of it doing so).

This volatility "smirk" is often seen in out-of-the-money puts and in-the-money calls being more volatile and "expensive".

### Forward Skew

![](/files/WyE2dADsH6RsBgKAxk39)

Forward skew is typically observed when the market perceives more risk to the upside in the asset, as compared to the downside.

In this case the implied volatility at the higher strikes is greater than those at the lower strikes. This means that OTM calls and ITM puts would be in greater demand than OTM puts and ITM calls.

Forward options skew is common in some commodities markets, especially when a lack of supply is expected to drive up the commodity prices.

#### Related:

[Read here about 10Δ 25Δ Skew/ Risk Reversal metric.](/laevitas-metrics/10d-25d-skew-risk-reversal.md)