Hermēs DocumentationVolatility Skew
Why IV differs across strikes at the same expiry — why puts cost more than calls, what steepening/flattening means, and how to read it with the C/P Skew card in HermesGEX.
One-line positioning
At one expiry, different strikes carry different IV. Connect them across strike and you get skew. For equity indices, puts are almost always richer than calls.
Mantra: pricey puts are normal, pricey calls are abnormal.
Downside puts richer than upside calls = everyone bidding downside insurance (normal); a steep skew = fear-pricing heating up; the reverse — calls richer than puts — is abnormal, typical of the eve of a retail call-buying squeeze.
Section 1: Why it's a put skew
| Observation | Mechanism |
|---|---|
| OTM put IV is high | Declines are fast and fearful; hedging/insurance demand piles onto the downside |
| OTM call IV is low | Rallies usually grind; few buy insurance against "rising too much" |
| The further down, the richer | The more extreme the crash, the more buyers will pay for protection |
In one line: the shape of skew = the market's pricing of "which direction is scarier." Equity indices always fear the downside more, so they always show put skew.
Section 2: How skew moves, and what it means
| Skew change | Mechanistic meaning (conditional) | Felt environment |
|---|---|---|
| Steepening (puts richer) | Downside insurance demand heating up, fear being priced | Risk event nearing / sell-off starting |
| Flattening (puts ≈ calls) | Worry about the downside cooling, complacency | Calm / late grind-up |
| Reversal (calls richer than puts) | Abnormal — buyers chasing upside calls | Eve of a single-name squeeze / extreme FOMO |
Calls richer than puts = a red flag for you.
Normal markets don't do this. When it happens, it's usually retail frantically buying calls on some name, lifting upside IV above the downside — exactly the soil for a gamma squeeze (next chapter).
Section 3: Risk reversal (the one-minute version)
Trading desks summarize skew with one number, the "risk reversal": call IV − put IV at equal moneyness.
Risk reversal negative (put IV higher) → normal put skew
Risk reversal more negative → skew steepening, downside fear rising
Risk reversal turns positive (call IV higher) → abnormal, upside being chased (squeeze signal)You don't have to compute it — HermesGEX already renders it as a card.
Section 4: 👀 Where to see it in HermesGEX
| What you want | Where | How to read it |
|---|---|---|
| Current skew direction & intensity | Insight Rail · C/P Skew card | Shows the skew in points (pt) + a label |
| Puts rich (normal / fearful) | C/P Skew card · "Put rich" (red) | Positive and rising = downside insurance being bid harder |
| Calls rich (abnormal / squeeze) | C/P Skew card · "Call rich" (green) | Turns negative = upside being chased, a red flag |
| Near symmetric | C/P Skew card · "symmetric" | Both sides close, no clear tail preference |
Read the C/P Skew card next to the regime tile.
Put-rich steepening + a red main-chart tile (short gamma) = downside both fearful and amplified by hedging, the most dangerous combo; Call-rich + a wildly swinging GEX Trail = go read the Gamma Squeeze chapter, and don't sell naked.
Section 5: Two traps
1. A steep skew ≠ an immediate drop. It's an intensity gauge for downside-insurance demand, not timing. Steep can stay steep.
2. Put skew is the normal state, not a bearish call. Don't read ordinary put skew as "the market is bearish" — it's there every day. What matters is the change (steepening / reversal), not its mere existence.
Next steps
Skew and term structure both describe the shape of IV. Next is the most valuable chapter: when IV and time change, a dealer's delta drifts on its own, forcing price-independent hedging flow — vanna and charm.
Chapter mantra: pricey puts are normal, pricey calls are a red flag; a steepening skew = downside fear rising; watch the change, not the mere existence.
Frequently asked questions
What is volatility skew?
At the same expiry, implied volatility differs across strikes; connect those points and you usually get a sloped curve — that's skew. Equity indices almost always show "put skew" — out-of-the-money puts carry higher IV than out-of-the-money calls, because everyone is buying insurance against a decline.
Why do puts usually cost more than calls?
Because declines are fast and fearful, so hedging and insurance demand is structurally concentrated on the downside. More people buy puts, and bid them urgently, lifting downside IV — so for the same moneyness a put is richer than a call. It's not mispricing, it's the normal state of tail-insurance demand.
Is a steepening skew a bearish signal?
A steepening skew only means demand for downside insurance is heating up — it's an intensity gauge for fear-pricing, not a directional prophecy. It often coincides with selling, but is best read as a thermometer for "is the environment tensing up," paired with the GEX regime.
Volatility Term Structure
The same name quotes different IV at different expiries — near vs far, what an inversion means, and how to read it with the VIX family in HermesGEX.
Vanna & Charm
When IV moves and time passes, a dealer's delta drifts on its own, forcing price-independent hedging flow — the mechanism behind the afternoon lift and the closing magnet, and how to read it on the Greek Flow page.