Explanation

When the volatility skew slopes downward to the right (also known as a negative skew), this means:

• Lower strike prices (out-of-the-money puts) have higher implied volatilities
• Higher strike prices (out-of-the-money calls) have lower implied volatilities

This pattern indicates that the market is pricing in:

• Higher probability of large downward moves (fat left tail)
• Lower probability of large upward moves (thin right tail)

Compared to the lognormal distribution assumed in the Black-Scholes-Merton model (which has symmetric volatility and equal tail probabilities), the actual market-implied distribution has:

• Fat left tail - Higher probability of extreme negative returns
• Thin right tail - Lower probability of extreme positive returns

This is consistent with option A: "A fat left tail and a thin right tail."

The downward-sloping volatility skew is commonly observed in equity markets where investors are more concerned about downside risk (market crashes) than upside potential, leading them to pay higher premiums for downside protection (put options).