What Is a Volatility Smile or Volatility Skew?
A volatility smile or skew is the pattern where options with the same expiration date but different strike prices have different implied volatilities. A 'smile' shows higher IV for both out-of-the-money (OTM) and in-the-money (ITM) options than for at-the-money (ATM) options.
This phenomenon contradicts the Black-Scholes model and reflects the market's perception of tail risk.
