What Is the ‘Volatility Smile’ or ‘Skew’ in Cryptocurrency Options and How Does It Impact Spread Quoting across Different Strikes?

The volatility smile or skew is the empirical pattern where options with the same expiration date but different strike prices have different Implied Volatilities (IVs). Market makers widen the bid-ask spread on options at the "tails" of the smile (deep Out-of-the-Money or In-the-Money) because these strikes represent greater tail risk and are less liquid, demanding a higher compensation for the associated risk.