Direct Answer
Put skew compares the implied volatility of out-of-the-money puts, typically at a fixed delta such as 25-delta, with at-the-money implied volatility for one expiry. It indicates how much extra the market charges for downside protection. Values above 1 in the ratio form (or above 0 in the difference form) mean puts are richer than the center of the smile.
Put Skew: Formula, Meaning, Signals, Examples and How to Use It
How Is Put Skew Calculated?
Put skew compares the implied volatility of out-of-the-money puts, typically at a fixed delta such as 25-delta, with at-the-money implied volatility for one expiry. It indicates how much extra the market charges for downside protection.
Formula: put skew = IV_OTM put (for example 25-delta) / IV_ATM, or IV_OTM put - IV_ATM
Inputs:
- Implied volatility of an out-of-the-money put at a fixed delta
- At-the-money implied volatility
- A single expiry
Worked example. With a 25-delta put at 31% and at-the-money volatility of 22%, the put skew ratio is 1.41. The inputs are illustrative numbers, not market data.
Reading it. Values above 1 in the ratio form (or above 0 in the difference form) mean puts are richer than the center of the smile. A steeper skew is read as greater demand for downside hedges or greater perceived crash risk.
Limits. Ratio and difference versions are both in use and are not interchangeable. The measure reflects supply and demand for puts as much as expected moves, and it depends on the expiry and delta chosen.
What is Put Skew?
Put skew compares the implied volatility of out-of-the-money puts, typically at a fixed delta such as 25-delta, with at-the-money implied volatility for one expiry. It indicates how much extra the market charges for downside protection.
How to use Put Skew
Values above 1 in the ratio form (or above 0 in the difference form) mean puts are richer than the center of the smile. A steeper skew is read as greater demand for downside hedges or greater perceived crash risk. A reading alone is never a buy or sell signal; it needs context from price structure, volume, volatility and the broader market regime.
Strengths
- Measuring the out-of-the-money put wing against at-the-money volatility isolates how much extra is paid for downside strikes.
- Using a fixed delta or ratio keeps the figure comparable between days even as the strike corresponding to that delta moves.
- Reproducible when the formula and data convention are fixed.
Weaknesses and limitations
- When at-the-money volatility rises sharply, a ratio form can fall even while the put wing is also rising in absolute terms.
- It covers one side of the smile, so a rise in skew can reflect a drop in at-the-money volatility rather than richer puts.
- Correlated indicators can create false confidence by repeating the same underlying information.
Editorial and risk note
This page is educational content, not individualized investment advice. It should not imply guaranteed prediction, accuracy or outperformance.
Frequently Asked Questions
Is Put Skew a buy or sell signal?
No. Values above 1 in the ratio form (or above 0 in the difference form) mean puts are richer than the center of the smile. Ratio and difference versions are both in use and are not interchangeable. A trade built on it still needs a trigger, an invalidation rule, a position size and realistic execution assumptions.
What is the best setting for Put Skew?
Put Skew is computed from implied volatility of an out-of-the-money put at a fixed delta; at-the-money implied volatility; a single expiry, so the choices that matter are the data convention and the window it is read over. Test those across instruments, regimes and out-of-sample periods instead of fitting one historical winner.
Can Put Skew be used by itself?
Ratio and difference versions are both in use and are not interchangeable. The measure reflects supply and demand for puts as much as expected moves, and it depends on the expiry and delta chosen. For that reason it is read next to measures of direction, participation, valuation, liquidity and risk, not alone.
Does Put Skew work on every timeframe?
The calculation (put skew = IV_OTM put (for example 25-delta) / IV_ATM, or IV_OTM put - IV_ATM) can be run on any bar size, but behavior is not portable: a reading on a five-minute chart describes a very different market window from the same reading on a daily chart. Validate the exact timeframe before relying on it.
Why does Put Skew give false signals?
When at-the-money volatility rises sharply, a ratio form can fall even while the put wing is also rising in absolute terms. It covers one side of the smile, so a rise in skew can reflect a drop in at-the-money volatility rather than richer puts. Lag, noise and regime changes add to this, because market participants react to new information after the reading is calculated.
How should Put Skew be backtested?
Rebuild Put Skew from implied volatility of an out-of-the-money put at a fixed delta using point-in-time data, write the rules before testing, include delisted securities where relevant, model realistic fills and costs, reserve a validation sample and compare with a simpler baseline.