How Does the Concept of “Volatility Smile” Change during Extreme Market Stress?

The volatility smile, or skew, typically deepens during extreme market stress. It represents the tendency for options with the same expiration but different strike prices to have different implied volatilities.

During a crash, demand for protective out-of-the-money put options surges, causing their implied volatility to spike much higher than at-the-money options. This asymmetry makes the "smile" more pronounced or "smeared."