The difference in implied volatility (IV) between out-of-the-money, at-the-money and in-the-money options. Volatility skew, which is affected by sentiment and the supply/demand relationship, provides information on whether fund managers prefer to write calls or puts.

Also known as "vertical skew".



A situation where at-the-money options have lower IVs than out-of-the-money options is sometimes referred to as a volatility "smile", due to the shape it creates on a chart (as above). In markets such as the equity markets, a skew occurs because money managers usually prefer to write calls over puts.