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.
Glossar
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.
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.
Market Expectation
Anticipation ⎊ Market expectation, within cryptocurrency, options, and derivatives, represents a collective forecast of future price movements, derived from observed trading activity and order flow.
Volatility Smile
Shape ⎊ This refers to the graphical representation of implied volatility plotted against the option's strike price, which deviates from the flat line predicted by basic models.