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How does IV skew vary across strike prices?

Implied volatility (IV) skew refers to the difference in implied volatility levels among different strike prices of options. IV skew can vary across strike prices, and its behavior is influenced by market dynamics and factors specific to the underlying asset. Generally, there are two common patterns observed in IV skew:

Normal Skew: In many cases, especially in equity markets, IV skew exhibits a normal skew pattern. As strike prices move closer to being in-the-money, the implied volatility tends to decrease. Conversely, as strike prices move further out of the money, the implied volatility tends to increase. This reflects the market's perception that there is a higher potential risk associated with downward price moves compared to upward price moves.

Reverse Skew: In certain scenarios, such as during market downturns or events with heightened uncertainty, IV skew may exhibit a reverse skew pattern. In this case, the implied volatility of out-of-the-money options is lower compared to in-the-money options. This can be attributed to increased demand for downside protection, driving up the prices and implied volatility of deep in-the-money put options.

It is important to note that IV skew is not always consistent across all strike prices and can vary depending on the specific market conditions, supply and demand dynamics, and the sentiment of market participants. Traders and investors analyze IV skew, the curvature and other characteristics to gain insights into market expectations and use it to inform their options trading strategies.

Refer this video which I am sending across, for your reference. This shall enable option traders understand the behaviour of prices and shape of the skew.

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