Volatility Smile

Options

Side

Expiration

Description

The volatility curve refers to the 2D or 3D surface that one obtains by plotting implied volatility against strike price. Given that implied volatility is calculated using Black-Scholes, which assumes a normal distribution, the options at the tail ends (deep ITM or OTM) of the curve typically tend to have a higher implied volatility than those in the more central portions, thus giving its characteristic smile.

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