In the 2010 documentary film Classic Albums: Black Sabbath's Paranoid, Geezer Butler states the music was inspired by the band's encounter with skinheads, who are the "fairies" in the song.
However, in the 2004 release of Black Box: The Complete Original Black Sabbath (1970–1978), Tony Iommi states the title was inspired from an incident when Geezer and Ozzy were smoking cannabis and saw fairies in boots running around a park, and not from an encounter with skinheads. In Ozzy Osbourne's autobiography I Am Ozzy he stated he doesn't know what the song is about, but everybody told him he wrote the lyrics. Per an interview with the band on AXS TV's show Classic Albums, the song was about skinheads.
The song contains an instrumental intro entitled "Jack the Stripper".