Unit 1 · Level 3 · The volatility surface
The smirk: why puts cost more
Before October 1987, index options were priced almost flat, with puts and calls at similar IV. Then Black Monday hit: the Dow fell 22.6% in ONE day, and sellers of cheap puts were annihilated. Ever since, downside puts on equity indexes have carried permanently higher IV than upside calls. That tilt is called skew. It's crash memory, priced in for nearly four decades.
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What you get asked
On equity indexes, 'skew' means…
Skew is the IV tilt across strikes: the market bids up downside insurance because crashes are real. It's persistent, not an error.
Skew exists because markets crash ___ but grind up slowly, so downside insurance carries a permanent premium.
The elevator down, the stairs up. Asymmetric speed of losses is why put protection stays structurally bid.
Match the market to its typical skew shape
Skew is a fear-and-greed map. Where the crowd's nightmare (or dream) lives, IV is highest.
Call IV on a meme stock jumps far above put IV. What is the skew telling you?
Skew flips to the call side when lottery-ticket demand dominates. GameStop in 2021 was a textbook case. It shows what's feared or craved, never what's certain.
Why is selling 'expensive' index puts still dangerous, even though skew makes them rich?
Skew is compensation for real tail risk, not free money. The put sellers of 1987 collected pennies for years, then lost everything in a day. 🐜
The rest of this unit
Skew, term structure and IV rank: the 3D map every options pro trades from.