Volatility Smile

The volatility smile is a pattern observed in options trading where the implied volatility—that is, the market's expected fluctuation of an asset's price—varies with different strike prices. Instead of being constant, implied volatility often forms a curve resembling a smile: it’s higher for options that are deep in-the-money or out-of-the-money and lower for at-the-money options. This pattern indicates that traders expect more price swings in extreme scenarios, and understanding it helps in better pricing and managing risks in options markets.