volatility skew

Volatility skew refers to the pattern observed in options markets where implied volatility varies with the strike price or expiration date. Instead of being constant, implied volatility often increases for certain strike prices, indicating that traders see higher risk or uncertainty for those options. For example, options that protect against big drops ("out-of-the-money puts") usually have higher implied volatility than those deep in the money or at the money. This pattern helps traders understand market perceptions of risk and influences options pricing, reflecting factors like expected crashes or bullishness.