What Is a "Volatility Skew" or "Smile" and What Does It Indicate about Market Sentiment? ▴ Learn

What Is a “Volatility Skew” or “Smile” and What Does It Indicate about Market Sentiment?

The volatility skew (or smile) is the pattern where options with different strike prices for the same expiration date have different implied volatilities (IV). A "smile" shows OTM and ITM options having higher IV than at-the-money (ATM) options.

This pattern indicates that the market expects larger price movements (higher risk) for extreme outcomes. In options, a skew is common, reflecting a higher demand for downside protection, which leads to wider spreads and higher slippage for those contracts.

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