Blog Home / Financial Terms / Volatility Smiles

Volatility Smiles

Volatility smiles are implied volatility patterns generated when option traders allow implied volatility to depend on the strike price

Volatility smiles are implied volatility patterns generated when option traders allow implied volatility to depend on the strike price. These smiles or graphs reflect the implied volatility as a function of the ratio of the option’s strike (or exercise) price to stock price.

Volatility Smiles

Why is Volatility Smile Important?

Volatility smiles can be seen when comparing various options with the same underlying asset and same expiration date but different strike prices.
The smile shows that the options deep in the money (ITM) or deep out of the money (OTM) have the highest implied volatility. Options with the lowest implied volatility have strike prices at the money (ATM) or near the money.

Owais Siddiqui
1 min read
Related:
Financial TermsCPD
Dow Theory: Understanding the Primary Trend and the Secondary Trend
Sagar Pujari 04 July 2022
Financial TermsFRM
What is Standard Deviation?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Hedging,Types and Importance
Owais Siddiqui 19 September 2022
Financial TermsFRM
What is Hedging?
Owais Siddiqui 19 September 2022
Financial TermsFRM
Variance
Owais Siddiqui 19 September 2022

Shares

Leave a comment

Your email address will not be published. Required fields are marked *