Why OTM puts are more expensive than OTM calls — and how to profit from the asymmetry in implied volatility across strikes.
Volatility Skew refers to the pattern where out-of-the-money (OTM) put options consistently have higher implied volatility than at-the-money (ATM) or out-of-the-money call options at the same expiry. If you plot IV across all strike prices, instead of getting a flat horizontal line (as Black-Scholes assumes), you get a curve that slopes downward from left to right — this is the skew.
For example, if Nifty is at 24,500, you might see: the 24,500 ATM CE and PE both have IV of 14%. But the 24,000 PE (500 points OTM) has IV of 17%, while the 25,000 CE (500 points OTM) has IV of only 12%. This asymmetry is the skew. The put side is "richer" than the call side.
The skew exists because markets crash faster than they rally. The 1987 Black Monday crash, the 2008 financial crisis, and the 2020 COVID crash all demonstrated that downside moves are sudden, violent, and much larger than typical upside moves. Institutional investors and portfolio managers pay a premium for downside protection (OTM puts), driving up their IV. This structural demand creates the persistent skew.
Before 1987, the volatility surface was relatively flat — a "smile" pattern where both OTM puts and calls had similar IV. After the crash, the "smirk" or "skew" became the dominant pattern in equity markets worldwide, including on Nifty options.
The "smile" (dashed) shows equal IV for OTM puts and calls. The "skew" (solid) shows OTM puts with higher IV — the modern reality for equity indices.
25Δ Put: The put option with Delta of -0.25 (approximately 500 points OTM for Nifty)
25Δ Call: The call option with Delta of 0.25 (approximately 500 points OTM for Nifty)
Typical Nifty Skew: 3-6% in calm markets, 8-15% during sell-offs
Skew Ratio: Greater than 1.0 indicates normal put skew. Values above 1.3 are extreme.
Nifty at 24,500. Expiry: 7 days.
24,500 ATM IV: 14.0%
24,000 PE (500 OTM) IV: 17.5%
25,000 CE (500 OTM) IV: 12.0%
Skew = 17.5% - 12.0% = 5.5 percentage points
Skew Ratio = 17.5 / 12.0 = 1.46
This means OTM puts are 46% more expensive in volatility terms than equidistant OTM calls. Sellers who sell the 24,000 PE collect more premium than those selling the 25,000 CE, despite both being equidistant from ATM.
Institutional investors (mutual funds, FIIs) hold massive long equity portfolios. They need insurance against crashes. This constant buying of OTM puts creates structural demand, pushing up put IV. This is the primary driver of skew in Nifty options.
Markets fall faster than they rise. A 10% crash can happen in a week, but a 10% rally usually takes months. This asymmetry means OTM puts are more likely to go ITM quickly than OTM calls, justifying their higher IV.
During sell-offs, leveraged traders face margin calls, forcing liquidation which amplifies the decline. This cascading effect makes crashes self-reinforcing. OTM puts price in this tail risk, which has no upside equivalent.
Natural sellers of OTM puts (market makers, premium sellers) demand higher premiums to compensate for crash risk. Natural buyers of OTM calls (speculators) are price-sensitive. This supply-demand mismatch keeps put IV elevated.
Skew varies not just across strikes but also across expiries. Near-term options typically have steeper skew than far-term options. This is because short-term crash risk is more binary — either a crash happens this week or it does not. Longer-dated options smooth out this binary risk.
For Nifty weekly options (5 days to expiry), the skew between 500-point OTM puts and calls might be 6-8%. For monthly options (25 days), the same skew might be 3-4%. For quarterly options (60+ days), it narrows to 2-3%. This means selling OTM puts on weekly expiries earns you proportionally more skew premium than selling on monthly expiries.
Before major events (elections, budget), put skew steepens dramatically as demand for protection surges. Post-event, the skew flattens rapidly. Before the 2024 election results, Nifty 25-delta put IV was 12 points higher than 25-delta call IV. The day after results, the skew compressed to just 4 points. This skew compression itself can be traded.
Sell an OTM put (high IV) and buy an OTM call (low IV) at the same expiry. You earn the skew difference. This is a bullish strategy that benefits from both upside movement and skew compression. Best when skew is abnormally steep and you expect a rally.
Buy 1 ATM put and sell 2-3 OTM puts at a lower strike. The OTM puts have higher IV, so you collect more premium per unit of IV. This captures skew while maintaining some downside protection. Popular among Nifty professionals.
Bull put spreads (selling put spread) collect more premium than bear call spreads at equal distance from ATM, because put IV is higher. Skew-aware traders prefer selling put spreads over call spreads for better risk-reward, even when mildly bearish.
When skew reaches extreme levels (above 10% differential), sell the overpriced OTM puts and hedge with the underlying or ATM options. As skew normalizes, the trade profits regardless of direction. This requires significant capital and expertise but is a core institutional strategy.
Changes in skew can signal shifts in institutional positioning and provide directional clues that price action alone does not reveal.
Steepening Put Skew: Institutions are aggressively buying OTM puts — a warning sign. Even if Nifty is rallying, increasing put skew suggests smart money is hedging. This often precedes corrections.
Flattening Put Skew: Demand for crash protection is declining. Institutions are reducing hedges, suggesting confidence. This often accompanies sustained rallies.
Call Skew Appearing: Rare but significant. When OTM call IV exceeds OTM put IV, it signals extreme bullish speculation or short squeeze expectations. Seen occasionally in Bank Nifty before major banking sector rallies.
Monitor the 25-delta skew daily. Plot it alongside Nifty price. Divergences (rising skew + rising Nifty, or falling skew + falling Nifty) are the most actionable signals.
The skew premium exists for a reason — crashes happen, and they are devastating. OTM puts have historically been "expensive" relative to calls, but they still lose less money on average than the damage a crash causes. Sell into steep skew with defined risk, never sell naked OTM puts just because IV is "high."
The smile is symmetric (both wings elevated equally), while the skew is asymmetric (put wing much higher). Equity indices show skew, currencies show smile, commodities can show either. Identify which pattern your instrument exhibits before designing trades.
Skew changes dynamically with market conditions. During extreme fear (VIX above 30), put skew can double. During extended rallies, it can nearly disappear. The skew you observed yesterday may not exist today. Monitor skew in real-time, especially around events and market regime changes.
Black-Scholes assumes constant volatility, which is clearly wrong. The skew is the market's correction to this model limitation. Real-world returns have fat tails and negative skewness. The IV skew is the market pricing in these statistical realities. Skew is not an error — it is the market being smarter than the model.
Open your Demat account today and take the first step towards mastering the stock market.
Click Here to Get Started