Volatility Skew and Smile

Volatility skew and smile are patterns in the implied volatility surface that show how volatility varies across different strike prices. A skew occurs when implied volatility is higher for puts than for calls, or vice versa, indicating that the market expects a larger move in one direction.

A smile occurs when implied volatility is higher for both deep out-of-the-money puts and calls compared to at-the-money options, reflecting a market expectation of extreme price moves. These patterns provide deep insight into market sentiment and the perceived risks of tail events.

In crypto, the skew is frequently steep, reflecting the persistent fear of market crashes. Traders use these patterns to identify where the market is mispricing risk and to construct trades that exploit these biases.