The Wacky World of Volatility Skew

Published on: December 12, 2025

Why Options Are Like a Lopsided Seesaw Party.

Imagine you’re at a playground, but instead of kids, it’s a bunch of stock options goofing around on a seesaw. On one side, you’ve the “put” kids (pessimistic, betting the stock will plummet) and on the other, the “call” kids (optimistic, wagering it’ll soar). Now, picture this seesaw tilting because the put kids are chowing down on extra ice cream cones—making them heavier and bouncier.

That’s volatility skew in a nutshell: the uneven “bounciness” (aka implied volatility) across different option strikes. It’s not fair, it’s not balanced, but it does create some profitable trading opportunities.

Let’s keep it simple, using the trusty option chain as our roadmap, and then spill the beans on how this skew lets you pull off sneaky strategies like ratio spreads and the oh-so-exotic Jade Lizard to cash in when things “normalize” back to boring equilibrium.

Volatility Skew: The Option Chain’s Comedy of Errors

First off, what’s an option chain?
It lists all the available calls and puts, sorted by expiration date and strike price. Columns include the volume, open interest, and implied volatility (IV) which tells how much the market expects the underlying to wiggle before expiration.

In a perfect world, IV would be the same for all options with the same expiration, right? But no.

Enter volatility skew, the market’s way of saying, “Nah, let’s make it quirky.” Typically, it’s a “put skew” where out-of-the-money (OTM) puts (those betting on a big drop) have higher IV than at-the-money (ATM) options or OTM calls.

Why?
Because humans are drama queens—we freak out more about crashes (hello, 2008 financial crisis or 2020 COVID dip) than moonshots. So, the market prices in extra “fear premium” for those downside protectors.

Let’s look at a NIFTY option chain of April 2025 expiry on 7^th April when the VIX was at its peak in 2025.

NIFTY 24April2025 Option Chain

As can be seen in the option chain, the 21700 put (OTM downside bet) has a spicy 25.25% IV, while the 22300 call (OTM upside bet) is chilling at 21.85%. The chain’s IV smiles like a smirk as seen below – higher on the left (puts), flatter on the right (calls). This skew screams, “Market’s scared of falling, not flying!” It’s like the puts are hyped on caffeine, demanding higher premiums, while calls are napping.

Skew can also flip to “call skew” in bubbly markets where OTM calls get the IV boost. But put skew is the classic villain, showing up after earnings bombs or geopolitical disturbances.

Volatility Skew (Smirk)

Skew Shenanigans: Turning Fear into Ratio Spread Riches

Now, the interesting part: exploiting this skew before it “normalizes.”

Volatility normalization is like the party winding down—after a big event (say, an Election or RBI policy announcement), the exaggerated skew flattens as fears fade, IV drops across the board and things return to a more even keel. If you’ve positioned yourself right, you pocket the premium decay.

Enter the ratio spread, the quirky cousin of basic spreads. A put ratio spread might involve buying one OTM put with high IV (expensive, but protective) and selling two even further OTM puts with even higher skew-inflated IV (collecting double premium).

Example: With NIFTY at 22000, buy 1x 22000 put (IV 23.5%) and sell 2x 21700 puts (IV 25.25%). As a result, you get net credit as you get more from selling the high-IV puts than you pay for the lower one.

A Typical Put Ratio Spread

Why skew helps?
The skew pumps up those far-OTM put IVs, so you sell at high prices. As volatility normalizes (skew flattens, IV drops), the sold puts lose value faster than your bought one, turning your credit into profit. But watch out—it’s naked on the downside if things really tank, like a seesaw flipping you off.

Risk management:
Use it in moderately bearish setups where you expect a mild dip, not a crash. For calls, a call ratio spread flips it: Buy 1x ATM call (lower IV) and sell 2x OTM calls (even lower IV, but skew means they’re not as underpriced). Skew often makes this less juicy than puts, but in call-skew scenarios (e.g., post-earnings hype), it’s gold.

The Jade Lizard: Skew’s Sneaky Sidekick Strategy

If ratio spreads are the class clown, the Jade Lizard is the mysterious magician— a hybrid that exploits skew without upside risk. It’s basically a short naked put plus a call credit spread but tweaked for a net credit exceeding the call spread’s width. To initiate a Jade Lizard, sell an OTM put (high skew IV = fat premium), sell an OTM call, and buy a further OTM call to cap upside losses.

Example with NIFTY at 22000: Sell 21600 Put (IV 25.46%, premium 274.65), sell 22300 call (IV 21.85%, premium 323.7), buy 22600 call (IV 21.15%, premium 204). Net credit: 274.65 + 323.7– 204 = 394.35.

The call spread width is 200 and your credit 394.35.

For a true Jade Lizard, aim for credit > width to eliminate upside risk beyond the credit; the bought call covers if it rises.

Skew’s magic:
That high-IV OTM put you sell? It’s bloated with fear premium, so you collect extra juice. As skew normalizes post-event (IV drops, especially on puts), the short put’s value evaporates quicker, boosting profits. Ideal in sideways-to-bullish markets where skew is pronounced after a scare—think post-vol spike when everyone’s calming down.

A Typical Jade Lizard

Volatility skew isn’t just a market glitch; it’s the quirky heartbeat of options trading, revealed in every option chain like a telltale smirk.

By spotting that IV imbalance, you can sling ratio spreads to ride the downside fear or conjure Jade Lizards for low-risk premium feasts.

And when volatility normalizes?
It’s like the seesaw balancing out, leaving you with the candy (profits) while others nurse their bruises. Remember, trading’s no playground—trade using proper risk management.

You can get Volatility Skew of Index and Stock Options on OPSTRA. Higher VolSkew values means the underlying options are showing a put-skew and negative VolSkew values means the underlying options have call-skew

https://opstra.definedgesecurities.com/volskew