What Is a ‘Volatility Skew’ or ‘Smile’ and What Does It Imply about Market Expectations?

Volatility skew or smile refers to the phenomenon where options with the same expiration date but different strike prices have different implied volatilities. A 'skew' (often seen in equity options) implies the market expects a higher chance of extreme downside moves.

A 'smile' (common in currency and sometimes crypto) suggests the market expects high volatility for both out-of-the-money calls and puts, reflecting uncertainty about large moves in either direction.