What Is the Volatility Smile or Skew in Option Pricing?

The Volatility Smile or Skew is the graphical representation of Implied Volatility (IV) plotted against the option's strike price. It shows that IV is typically not constant across all strikes.

The "smile" or "skew" indicates that OTM and ITM options often have higher IV than ATM options, reflecting the market's perception of higher probability for extreme price movements (tail risk).