What Is Options Skew? Why Downside Protection Always Costs More

This article assumes you're familiar with IV (Implied Volatility). Not yet? Start here: What Is Implied Volatility (IV)?

If you've traded a few Bull Put Spreads, you've probably noticed something:

On the same underlying, with strikes equidistant from current price, the put side almost always pays more than the call side.

That's not random. It's market structure. It has a name: Skew.

Start With an Observation

Say SPY is at $540.

• Sell the $510 Put (5.6% below current price) — collect $3.50
• Sell the $570 Call (5.6% above current price) — collect $1.80

Same distance from spot. Why does the put pay almost twice as much?

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The Reason: Markets Fear Crashes More Than Rallies

The market's fear of a large drop is much stronger than its fear of a large rally.

The logic is straightforward:

• Institutions, funds, and large holders are long equities. They buy puts to hedge downside exposure.
• Nobody needs to buy calls to "protect against a market rally."

This asymmetric demand keeps implied volatility elevated on low-strike puts and relatively suppressed on high-strike calls.

Plotted out, it looks like this:

IV
 |  *
 |    *
 |      *
 |          *
 |               *  *  *
 +-----------------------------→ Strike
Low Put         ATM       High Call

Lower strikes, higher IV. That slope is Skew.

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Market Skew vs. Individual Stock Skew

Market Skew (SPY / SPX)

Market skew reflects the aggregate hedging demand against broad market declines. The CBOE SKEW Index quantifies this directly.

Reading the SKEW Index:

One important distinction: SKEW and VIX can diverge. VIX measures the overall level of volatility priced in. SKEW specifically measures the fear of a rare, catastrophic drop. You can have low VIX (calm market) but high SKEW (smart money still quietly buying crash protection). You can also have both spike at the same time. They answer different questions.

High market skew doesn't mean a crash is coming. It means someone is paying up to protect against one.

Individual Stock Skew

The logic is the same, but the drivers differ:

• Earnings: Market uncertainty about direction inflates ATM IV, but downside fear makes low-strike puts expensive. Skew gets steep before reports.
• Event risk (FDA decisions, lawsuits, macro data): Same pattern.
• Normal conditions: Put skew exists at all times, but is less extreme.

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What This Means If You Sell Bull Put Spreads

BPS positions live in exactly where skew is steepest — selling low-strike puts.

A few things this implies:

You're a natural beneficiary of skew

The put you sell has skew premium built in. You're collecting more than "fair value" according to realized vol. This is part of why selling put spreads has a structural positive expected value over time — you're being paid to absorb hedging demand.

High skew deserves more scrutiny, not less

Elevated skew means the market is pricing in meaningful downside risk. Smart money is buying protection for a reason. Yes, you'll collect more — but the risk you're taking is also higher.

A sharp skew spike before earnings is a warning sign: the market expects a big move. The question isn't "can I collect more?" It's "does this premium actually compensate for the event risk?"

Individual stock skew matters more than market skew

You're not trading SPY — you're trading individual names. NVDA's skew structure is completely different from SPY's.

High-beta growth stocks, biotech, leveraged names — these tend to have much steeper skew curves. The same entry logic applied to these stocks carries more risk than you might think from looking at the numbers alone.

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A Simple Pre-Trade Check

Before opening, look at whether the IV on your target put strike is significantly higher than the ATM IV.

If the low-strike put's IV is 1.5x+ the ATM IV, skew is steep. Ask yourself: why is the market paying that much to protect against this level?

You don't need to calculate it precisely. Just internalize this: your put costs more because someone is genuinely afraid of it getting hit.

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Now you understand market skew — the aggregate direction of fear. But individual stock skew is a different animal: why does a Delta -0.15 BPS on NVDA feel nothing like the same position on JNJ?

That's what the next piece covers.

Individual Stock Skew: Why the Same Delta Carries Different Risk on Different Stocks →