What Is the Difference between a “Volatility Skew” and a “Volatility Smile”?
A volatility smile is a plot where implied volatility is lowest for At-the-Money (ATM) options and increases symmetrically for both OTM calls and OTM puts. A volatility skew is a non-symmetrical curve where implied volatility is significantly higher for OTM puts than for OTM calls.
The skew is more common in equity and crypto markets, reflecting a greater demand for downside protection.
Glossar
The Volatility Smile
Phenomenon ⎊ The volatility smile is an empirical market phenomenon where implied volatility, derived from options prices, systematically differs across various strike prices for options with the same expiration date.
Volatility Skew
Bias ⎊ This term describes the non-symmetrical relationship between implied volatility levels for options with different strike prices, indicating a market bias toward expecting larger moves in one direction.
Volatility Smile
Curve ⎊ The volatility smile, observed in options markets, represents the graphical depiction of implied volatility across different strike prices for options with the same expiration date.