What Is the “Volatility Smile” or “Volatility Smirk” and What Does It Imply about Market Expectations?
The volatility smile/smirk is a pattern where options with the same expiration but different strike prices have different implied volatilities (IVs). A smile suggests that the market expects extreme price moves (both up and down).
A smirk, where OTM puts have higher IV than OTM calls, implies the market fears a sharp downside move (crash risk) more than a sharp upside move.
