Volatility Skew
The pattern that out-of-the-money puts trade at higher implied vol than equivalent OTM calls — pricing the demand for crash protection.
Definition
Skew measures the difference in implied vol across strikes at the same maturity. In equity indices, downside puts almost always trade richer than upside calls, reflecting persistent demand for hedges. The SKEW index quantifies this for SPX.
Steep skew = high crash insurance demand. Flat skew = complacency.
Public research record
Research framework · page evidenceCompleted application: Volatility Skew
Skew is a hidden positioning indicator. Sudden flattening often precedes risk-off; sudden steepening often marks late-cycle stress.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The pattern that out-of-the-money puts trade at higher implied vol than equivalent OTM calls — pricing the demand for crash protection. | Options |
| Release fact | Early 2018: SPX skew flattened to multi-year lows alongside record-low VIX. The February vol-pocalypse followed weeks later, with XIV blowing up. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
Why it matters
Skew is a hidden positioning indicator. Sudden flattening often precedes risk-off; sudden steepening often marks late-cycle stress.
Worked example
Early 2018: SPX skew flattened to multi-year lows alongside record-low VIX. The February vol-pocalypse followed weeks later, with XIV blowing up.