If the Black-Scholes model of options pricing did not make an incorrect assumption of log-normal distribution (bell curve) of price changes, then implied volatility (IV) skews found in equity index options, and many markets for equity options, would largely not exist.
Skews, in short, represent what is known as option mis-pricing in light of model pricing parameters. They can take the shape of “smiles” or “smirks” depending on prevailing conditions and built-in expectations.
Typically, if you are able to pull up equity index options strike price chains, you will see that the implied volatility of each option strike is not the same. Looked at another way, this means that prices are deviating from model (or theoretical) prices by different degrees as you move along the strike chain (up and down).
-John Summa, PhD
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