Skew: why puts and calls cost different amounts
If markets were perfectly symmetric, an out-of-the-money put and an equally out-of-the-money call would cost the same. They almost never do. In equity indexes, downside puts are consistently more expensive than upside calls — a pattern called volatility skew.
The reason is human and structural. Investors are mostly long stocks, so they fear crashes more than they fear rallies, and they pay up for downside protection. Crashes also tend to be faster and more violent than melt-ups, so realized volatility itself is higher on the way down. Both forces push the price of puts — and therefore their implied volatility — above that of calls. Skew is not a flaw to be smoothed away; it is information. A steep skew says the market is paying a large premium for downside insurance: fear is elevated or hedging demand is heavy. A flat or inverted skew — calls richer than puts — points to upside speculation, like a stock in a takeover rumor or a commodity in a supply squeeze.
A worked example
On a broad ETF, the 1-standard-deviation OTM put prices at an implied volatility of about 18 while the matching OTM call prices near 12. Downside protection costs meaningfully more than upside — classic index skew. RiskDex®, the ratio of PutDex® to CallDex®, captures that in one number: roughly 1.5, i.e. downside ~50% richer than upside.
Watch that ratio over time. If RiskDex® drifts down toward 1.1, the usual fear premium has drained away — complacency, or a contrarian setup where cheap downside is worth owning. Now flip to a biotech with a binary FDA decision: there you may see call skew, calls richer than puts, as speculators chase the upside. The shape tells you where the demand is.
Common pitfalls
Treating skew as an error to arbitrage. It is a persistent, rational feature of equity options, not a mispricing waiting to be corrected.
Reading one blended volatility number. A single figure averages puts and calls together and hides the skew — the most useful part of the signal.
Comparing skew across names by raw level. As with volatility itself, skew is best judged against each name’s own history.
Skew is also dynamic. It tends to steepen as a market falls — put demand surges exactly when protection is most wanted — and to flatten as fear drains during a calm grind higher. A moving RiskDex® is therefore often an early read on shifting risk appetite, not just a static snapshot of the surface.
What to do with this
Read skew as three distinct questions — how expensive are downside puts (PutDex®), how expensive are upside calls (CallDex®), and what is the ratio between them (RiskDex®) — rather than collapsing them into one number. Track RiskDex® against its own range to spot when fear is stretched or unusually cheap. Next: how volatility changes not across strikes, but across time.
Next lesson · continue the courseTerm structure: volatility across time →
The Nations family measures skew directly — PutDex® and CallDex® for each side, RiskDex® for the ratio. All live inside ETF Analytics.