What You'll Master
- Skew is the difference between put IV and call IV at equal delta distances from ATM
- High skew = fear — institutions are paying up for crash protection
- Skew predicted every major crash — 2008, 2020, and many you didn't notice
- Skew inversion is a warning flare — when call IV exceeds put IV, speculation is extreme
- Term structure of skew matters — short-dated skew spikes signal imminent danger
- Skew is actionable — learn when to hedge, when to fade, when to run
The Market's Lie Detector
Stock prices can lie. Earnings can be manipulated. CEOs can mislead. But the options market? It speaks truth through math.
Specifically, through something called skew — the difference between what traders pay for downside protection versus upside speculation.
When smart money gets nervous, they don't sell stocks immediately. That would move prices against them. Instead, they quietly buy put options. Protection. Insurance. And that buying shows up in the skew.
"Skew is the market's polygraph test. You can hide your trades, but you can't hide your fear. Every put you buy to hedge leaves a fingerprint in the volatility surface."
— Volatility Fund Manager, Citadel
Before every major crash, skew warned us. Most people just didn't know how to read it.
Skew Explained: The Fear Asymmetry
In a perfect Black-Scholes world, all options of the same expiration would have the same implied volatility. A call 10% above the current price would have the same IV as a put 10% below.
But markets aren't perfect. They're terrified.
After the 1987 crash, the options market fundamentally changed. Traders realized that stocks can crash much faster than they rally. A 20% drop in a day is possible. A 20% rally? Extremely rare. So they started paying more for downside protection.
The Permanent Scar of Black Monday
Before 1987, implied volatility was flat across strikes. After the crash, OTM puts became permanently expensive. This "smirk" is the market's PTSD — and it intensifies before every new crisis.
How we measure skew:
The most common measure is 25-delta skew: the difference between the IV of a 25-delta put and a 25-delta call.
- 25-delta put IV = 25%
- 25-delta call IV = 18%
- Skew = 7 vol points (puts are 7 points more expensive)
The higher the skew, the more traders are paying for crash protection relative to upside bets.
Low Skew (3-5 pts)
Calm markets. Protection is cheap. Complacency. Often precedes volatility expansion.
Normal Skew (5-8 pts)
Typical market conditions. Reasonable hedging demand. Nothing unusual.
Elevated Skew (10+ pts)
Fear building. Smart money accumulating protection. Warning sign.
Extreme Skew (15+ pts)
Crisis mode. Panic hedging. Puts are wildly expensive. Crash underway or imminent.
Skew Before the Storm: Historical Evidence
The beauty of skew is that it often rises before crashes become obvious. Smart money hedges quietly. The skew tells the story.
The Financial Crisis
SPX skew started rising in summer 2007 — a full year before Lehman. By July 2008, 25-delta put skew hit levels not seen since 1987. Someone knew the system was breaking.
COVID Crash
SPX skew spiked in late January 2020, when the virus was "just a China problem." By February 19 (market peak), skew was screaming. The 34% crash followed within a month.
The Bear Market
Skew on tech stocks (especially ARKK names) exploded in late 2021. Put IV on growth stocks doubled while calls stayed flat. The 80% decline was telegraphed.
Volmageddon
VIX skew inverted in January 2018 — VIX puts were more expensive than calls. Traders were betting vol would stay low. On Feb 5, VIX tripled. XIV died.
"I track skew every morning before I look at price. Skew tells me what institutions are doing with their real money. Price tells me what retail is doing with their opinions. I'll take the skew signal every time."
— Portfolio Manager, Multi-Billion Dollar Hedge Fund
Reading Skew Like a Professional
Raw skew numbers are just the start. Professionals look at multiple dimensions:
Skew Trend
Is skew rising or falling? Rising skew = growing fear. Falling skew = complacency returning.
Term Structure
Short-dated skew vs. long-dated. When front-month skew spikes above back months, the fear is imminent.
Skew vs. VIX
Skew rising while VIX is flat = stealth fear. When both spike, panic is public. Stealth fear often precedes the move.
Cross-Asset Skew
SPX skew rising while single-stock skew is flat = macro fear. The opposite = idiosyncratic concerns.
The Term Structure of Skew:
When the Curve Inverts
Normally, long-dated options have higher skew (more time for crashes to happen). When short-dated skew exceeds long-dated, traders are hedging something they expect SOON. This is the red alert.
The Rare Inversion: When Calls Get Expensive
For 99% of market history, puts are more expensive than calls. But sometimes, the unthinkable happens: call skew.
When out-of-the-money calls become more expensive than puts, it means:
- Massive speculative call buying
- Dealers short gamma on the upside
- Euphoria at extreme levels
- Potential blow-off top forming
GameStop Jan 2021
25-delta call IV exceeded put IV by 50+ points. Calls were more expensive than puts for the first time ever on a major stock. Peak was 2 days later.
Tesla Aug 2020
Before the 5:1 split, TSLA call skew inverted. Retail was buying calls so aggressively that the normal smile flipped. Topped within weeks.
Bitcoin ETF 2024
BITO calls had higher IV than puts at launch. Pure speculation. BTC dropped 20% within two months.
Meme Stocks Broadly
AMC, BBBY, SPCE all showed call skew at their peaks. It's the signature of retail frenzy.
"When I see call skew, I start preparing for the other side. It means retail is so euphoric that they're paying more for lottery tickets than insurance. That never ends well."
— Volatility Trader, Two Sigma
The Call Skew Warning
Call skew inversion is one of the most reliable contrarian indicators. It doesn't time the top perfectly, but it tells you you're in the final innings. When everyone is buying calls, who's left to buy?
Sector Skew: Finding Hidden Dangers
Index skew tells you about macro fear. But sometimes the real story is hiding in sector or single-stock skew.
Bank Skew 2023
XLF (financials ETF) skew exploded in early March 2023. SVB, First Republic, and Signature Bank collapsed within days.
Energy Skew 2022
Before Russia invaded Ukraine, energy stock skew was elevated for months. Insiders knew supply shocks were coming.
Semi Skew 2021
NVDA and AMD put skew hit extremes in late 2021. The sector crashed 50%+ in 2022.
Cannabis Skew
TLRY and other cannabis stocks showed extreme call skew at their peaks. Classic bubble signature.
Single-stock skew signals:
- Earnings skew: Put skew rising into earnings = someone expects a miss
- M&A skew: Call skew on takeover targets often appears before announcements
- Fraud skew: Extreme put skew on specific stocks can signal pending bad news (Enron, Wirecard)
- Short squeeze skew: Call skew + high short interest = potential squeeze setup
"The night before SVB collapsed, skew on regional bank options was off the charts. The options market knew 24 hours before depositors panicked. It always knows."
— Financial Risk Analyst
Trading Skew: Strategies That Work
Knowing skew is powerful. Trading it is an art. Here's how professionals approach it:
Skew Mean Reversion
When skew is extremely elevated (90th percentile+), it often reverts. Sell put spreads, buy call spreads. Harvest the fear premium.
Skew Momentum
Rising skew + rising VIX = trend trade. Buy puts or put spreads. Ride the fear wave rather than fade it.
Risk Reversals
Sell an OTM put, buy an OTM call (risk reversal). Profits when skew collapses AND stock rallies. High-conviction bullish trade.
Calendar Skew Trades
When front-month skew exceeds back-month, sell front puts and buy back puts. Profits from term structure normalization.
When to use each:
Fade Extreme Skew
After a crash, when VIX is 40+ and put skew is at extremes. Fear is priced in. Sell premium, collect the fear tax.
Ride Rising Skew
When skew is rising from normal levels and VIX is still low. The storm is coming. Buy protection before it gets expensive.
Trade Skew Dislocations
Single-stock skew diverging from sector? SPX skew diverging from VIX? These dislocations create opportunity.
Avoid Call Skew Tops
When call skew inverts, don't buy calls. Don't short (gamma squeeze risk). Just wait for normalization.
Where to Find Skew Data
You don't need a Bloomberg terminal to track skew. Here are accessible options:
VIX Skew (CBOE)
CBOE publishes the SKEW index — a direct measure of tail risk pricing. Free on their website. Above 150 = elevated fear.
ThinkOrSwim
TD Ameritrade's platform shows IV by strike. You can calculate skew yourself by comparing 25-delta put/call IVs.
OptionMetrics / IVolatility
Professional-grade data. Historical skew data going back decades. Paid but worth it for serious traders.
VolatilityTrading X
Many vol traders share daily skew observations. Follow @spotgamma, @jam_croissant, @VolatilityGuru for free insights.
The Market's Whisper Network
Price is what the market shows you. Skew is what the market tells you — if you know how to listen.
Every institution, every hedge fund, every informed trader who buys protection leaves a trace in the skew. They can't hide it. They can't fake it. The math reveals their fear.
Learn to read skew, and you'll see crashes coming before they appear on any chart. You'll spot euphoria before the bubble pops. You'll understand what the smart money is really doing.
This is Advanced Options. The skew is talking. Are you listening?
"In 20 years of trading, I've never seen skew lie. It's not perfect timing, but it's perfect truth. When the market is scared, skew knows. When the market is greedy, skew knows. It's the closest thing to an oracle that exists in finance."
— The Authors