What it means
Vol smile and vol skew describe the shape of implied volatility ACROSS STRIKES for a single expiration. Two main shapes: (1) Smile — both OTM puts and OTM calls have higher IV than ATM, creating a U-shape. Common in currencies, commodities, single-name stocks before earnings. (2) Skew — one wing (typically OTM puts) has higher IV than the other. Dominant in equity indices; reflects market fear of crashes more than rallies. The skew slope (25-delta put IV minus 25-delta call IV) is a clean sentiment indicator.
Why it matters
Skew tells you what the options market fears. Equity index skew is structurally negative (puts > calls) because crashes are larger than rallies. Single-name skew varies — biotech stocks have positive skew (binary FDA approval risk = upside spike risk); blue chips have mild negative skew. Tracking skew changes over time signals shifts in implied risk asymmetry.
How to use it
Track 25-delta skew on SPX, QQQ, and individual names. Compressed skew (put IV minus call IV near zero) = complacency; expand sharply = fear spike. Extreme skew often marks tops (no more buyers of crash protection because all buyers have it).
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