Volatility Skew: Why Puts Cost More Than Calls

The Black Monday Effect

Before the stock market crash of 1987 (Black Monday), implied volatility was generally symmetrical. An out-of-the-money call and an equidistant out-of-the-money put carried roughly the same implied volatility.

After the violent crash, the market realized that stocks drop much faster and harder than they rise. The pricing model fundamentally changed.

What is Volatility Skew?

Today, if you look at an options chain for the SPX, you will notice Volatility Skew (specifically, a “smirk” or put skew).

A put option that is 2% below the current price will have a noticeably higher Implied Volatility than a call option that is 2% above the current price.

Why Does Skew Exist?

1. Institutional Hedging: Large funds own massive amounts of stock. To protect against a crash, they continuously buy OTM puts as insurance. This relentless structural demand drives up the price (and IV) of puts.
2. Panic is Fast, Greed is Slow: Markets take the stairs up and the elevator down. A sudden 3% drop is much more common than a sudden 3% rally. Market makers price this reality into the options chain.

How Skew Affects 0DTE

For 0DTE traders, skew dictates the payout profile of credit spreads. Because puts are inherently more expensive, selling a put credit spread will generally yield a higher premium than selling an equidistant call credit spread. However, this higher premium exists precisely because the risk of a violent downside move is statistically higher.