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BlogPublished June 19, 2026 · 20 min read
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Volatility Skew and Smile: Why OTM Puts Pay More
Volatility skew and smile explained for option sellers: why out-of-the-money puts carry higher implied volatility, what causes the skew, and how to use it when selling.
Sell a put and a call the same distance from the money, and the put almost always pays more. That is not an accident. It is volatility skew, and it shapes every premium-selling decision in equities.
Implied volatility is not constant across strikes. In stock and index options it slopes upward toward lower strikes, so out-of-the-money puts carry richer implied volatility than equidistant calls. The pattern reflects how investors price crash risk.
This guide explains volatility skew and smile for option sellers: what they are, why equity puts are bid up, how the skew shows up in your strikes, and how to use it. This is education, not investment advice.
You will learn what volatility skew and the volatility smile are, why OTM puts pay more, and how the pattern affects strike selection.
Implied volatility isn't flat across strikes
If options were priced by a simple textbook model, every strike on the same expiration would share one implied volatility. In reality, plotting implied volatility against strike produces a curve, not a flat line. The shape of that curve is the skew or the smile, and it tells you where the market is charging more for risk.
Two shapes to know:
- Smile: IV is higher at both low and high strikes, lower at the money
- Skew (smirk): IV slopes up toward lower strikes; common in equities
- Equity index options show a pronounced downside skew
- The curve shifts and steepens as fear rises
The smile is more typical of currencies and some commodities; equities and indices show a left skew, where downside puts are bid up the most.
Why equity puts are bid up
Equity skew exists because investors fear crashes more than they chase melt-ups. Stocks tend to fall faster than they rise, and most market participants are long, so demand for downside protection is structurally high. That steady bid for OTM puts pushes their implied volatility, and their price, above equidistant calls.
What drives the downside skew:
- Crash risk: markets fall faster and harder than they rally
- Hedging demand: long investors buy puts for protection
- Leverage and forced selling amplify down moves
- The skew steepens when fear rises and flattens when it fades
In other words, put sellers are paid extra precisely because they are supplying the protection everyone else wants: compensation for the same crash risk discussed in historical vs. implied volatility.
How skew shows up in your strikes
Skew is why a 16-delta put and a 16-delta call on the same expiration rarely pay the same: the put usually pays more. It also means delta and implied volatility are intertwined, the richer put IV is part of why cash-secured puts and put-side spreads are popular vehicles for premium.
Practical implications:
- OTM puts collect more premium than equidistant OTM calls
- Put credit spreads can capture the steeper near-the-money put skew
- Iron condors are often asymmetric because the put side pays more
- In a panic, skew steepens: existing short puts feel it through vega
This skew is part of why so many sellers favor the put side. See selling puts, and why an iron condor rarely has perfectly symmetric premium on each wing.
| Strike | Type | Delta | Implied volatility | Premium |
|---|---|---|---|---|
| $85 | Put | ~10 | 38% | $0.55 |
| $90 | Put | ~16 | 34% | $0.95 |
| $95 | Put | ~30 | 31% | $1.80 |
| $100 | At the money | ~50 | 28% | $3.20 |
| $105 | Call | ~30 | 26% | $1.35 |
| $110 | Call | ~16 | 25% | $0.60 |
| $115 | Call | ~10 | 25% | $0.30 |
Read the two 30-delta rows against each other: the $95 put pays $1.80 and the $105 call pays $1.35, a third more for the same nominal probability of finishing in the money. The 16-delta pair shows the same gap. That difference is the skew, and it is visible on any equity chain you care to open (how to read an options chain).
Note also the implied volatility column: it falls monotonically from 38% at the low strike to 25% at the high one. On a currency pair you would more often see it curve back up on both ends, the smile. The shape itself is information about what the market is afraid of.
What skew does to the wheel
There is a consequence of skew that surprises sellers running the wheel, because it makes the two halves of the strategy structurally unequal.
The put phase sells into the rich side of the curve. You are supplying protection everyone wants, and you are paid a premium for it. The covered call phase sells into the cheap side. So the same 30-delta discipline that pays $1.80 before assignment pays roughly $1.35 afterwards, on the same stock, in the same market. The second half of the wheel is simply worse compensated than the first, and no amount of strike selection changes that. It is the shape of the curve.
Practical consequences:
- Expect the covered call phase to generate materially less income than the put phase
- Yield calculations built on put-phase premium will overstate a full wheel cycle
- The temptation is to sell closer-to-the-money calls to compensate, which caps upside exactly where recovery would come from
- On an assigned position underwater, that temptation is strongest and most expensive
The last two points describe how a wheel position quietly becomes a trap: assigned below your strike, you sell calls near the money for a decent credit, and then the stock recovers past it and the shares are called away at a loss. Skew is why the credit looked attractive; sizing and strike discipline are what stop you taking it (choosing strikes by delta).
Using skew without over-trading it
Skew is useful context, not a signal to chase. The extra put premium is compensation for real downside risk: selling more puts because they pay more is just taking more crash exposure. Use skew to understand your pricing, not to justify oversizing.
Sensible ways to use it:
- Expect put-side premium to exceed call-side at the same delta
- Recognize a richer put credit spread reflects more risk, not free money
- Watch skew steepening as an early sign of market stress
- Don't let attractive put premium override position sizing
The discipline that keeps skew from luring you into too much downside is position sizing, and concentration in correlated downside bets is covered in correlation and sector concentration.
Skew also differs by underlying in a way worth knowing before you compare premiums across names. Broad index options carry the steepest downside skew, because index puts are the instrument institutions buy to hedge whole portfolios: that persistent structural bid has no equivalent on the call side. Single stocks show a flatter skew, and one facing a binary event can even show a call-side bulge as speculators bid up upside. A put that pays unusually well relative to its call is telling you something about that specific name (SPY vs. SPX vs. single stocks, choosing candidates).
And the curve is not static. Skew steepens in stress and flattens in calm, which means an existing short put loses value from two directions at once in a selloff: the move itself, and the disproportionate rise in implied volatility at exactly the strikes you are short. That is the vega component of a bad day, and it is why a position can be marked at a large loss while still being far out of the money (options Greeks explained, drawdown and recovery).
Conclusion: the skew is the price of fear
Key takeaways:
- Implied volatility varies by strike: skew or smile, not a flat line
- Equities show a downside skew: OTM puts carry higher IV
- It reflects crash fear and hedging demand: real risk, fairly priced
- Use skew to understand pricing, not to oversize the put side
Educational only, not personal financial advice. More in the blog · Request access.
Frequently asked questions
- What is volatility skew?
Volatility skew is the pattern where implied volatility varies across strikes on the same expiration. In equities it slopes upward toward lower strikes, so out-of-the-money puts carry higher implied volatility than equidistant calls.
- Why do out-of-the-money puts have higher implied volatility?
Because investors fear crashes and most are long, demand for downside protection is structurally high. That steady bid for puts raises their implied volatility and price above equidistant calls.
- What is the difference between volatility skew and smile?
A smile has higher implied volatility at both low and high strikes; a skew (or smirk) slopes mainly one way. Equities and indices typically show a downside skew, while currencies more often show a smile.
- How does skew affect option sellers?
It means put-side premium usually exceeds call-side at the same delta, so put credit spreads and iron condors are often asymmetric. The extra premium is compensation for crash risk, not free money. See selling puts.
- Should I sell more puts because they pay more?
No. The richer put premium reflects greater downside risk. Selling more puts simply because skew pays more is taking on more crash exposure: let position sizing, not premium, set how much you sell.
- Why does the covered call side of the wheel pay less?
Because of skew. The put phase sells into the expensive side of the volatility curve, where hedging demand is concentrated, while the covered call phase sells into the cheap side. On the same stock at the same delta, the call can pay roughly a quarter to a third less, so yield estimates built on put-phase premium overstate a full wheel cycle.
- Does volatility skew change over time?
Yes. Skew steepens in stress and flattens in calm markets. For a short put that means a selloff hurts from two directions at once: the price move itself, and a disproportionate rise in implied volatility at precisely the lower strikes you are short, which can mark the position at a large loss while it remains well out of the money.
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