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.