Define “Volatility Smile” and Its Relation to Options Pricing during a Gap

Volatility smile is a pattern where options with very low and very high strike prices (far out-of-the-money) have higher implied volatility than at-the-money options. This reflects the market's expectation of extreme, low-probability events.

During a gap, the underlying asset's price has moved toward one of these "smiled" strikes, causing the IV of that option to spike further as the gap confirms the potential for extreme movement.