The three shapes
- Put skew (smirk): out-of-the-money puts have higher implied volatility than calls. This is the everyday shape for SPY and most large stocks, because investors buy crash protection.
- Call skew: upside calls are richer than puts. Common in squeezes, meme stocks, commodities and sometimes crypto stocks.
- Smile: both wings are expensive versus at-the-money — traders expect a big move but are unsure of direction (often before earnings).
Reading the 25-delta risk reversal
The risk reversal is the implied volatility of a 25-delta call minus a 25-delta put. Negative means puts are richer (fear of downside); a reading moving toward zero or positive means demand is shifting toward calls. Watch the trend over days more than any single number.
Reading the term structure
The term structure plots implied volatility by expiry. Normally it slopes up (longer dates cost more). When near-term volatility is above longer-term (inverted), the market is pricing stress or an event right now.
How traders use skew (examples, not advice)
- Steep put skew makes put spreads relatively cheap to sell and expensive to buy outright.
- Rising call skew alongside call-heavy unusual flow can confirm upside demand.
- An inverted term structure is a reason to size smaller and expect bigger daily ranges.