Skip to main content

What Is the Volatility Smile in Options Pricing?

The volatility smile is a graphical pattern observed in options markets where options with strike prices significantly higher or lower than the current asset price (out-of-the-money) have higher implied volatility than options with strike prices near the current price (at-the-money). This contradicts the Black-Scholes assumption of constant volatility and indicates market expectation of extreme price moves.

Define “Volatility Smile” in the Context of Equity Options and Its Implication for Pricing
Explain the Concept of “Volatility Smile” in Options Pricing and Its Financial Implication
What Is a ‘Volatility Smile’ and What Does It Suggest about the Black-Scholes Assumption?
How Does the Black-Scholes Model’s Assumption of Constant Volatility Fail to Capture the Volatility Smile?