Volatility Smiles

A volatility smile is a graphical representation that shows how the implied volatility of options varies with different strike prices, usually for the same expiration date. In an ideal market, options with strike prices farther from the current price should have similar volatility. However, in reality, options that are either very in-the-money or out-of-the-money tend to have higher implied volatilities, creating a "smile" shape when plotted. This phenomenon reflects market perceptions that extreme market movements (either up or down) are more likely than standard models predict, indicating traders' concerns about risk and uncertainty.