Volatility Smile
The pattern in which implied volatility rises as the strike moves further out-of-the-money in EITHER direction -- the curve of IV vs. strike "smiles" upward at both wings. Common in FX, commodities, and many single-stock options. Reflects the empirical fat-tailed nature of these markets: large moves in either direction are more frequent than a normal distribution would suggest, so far-OTM options on both sides command a premium. The smile is one of three canonical surface shapes alongside the skew and the term structure.
Lessons that use this term
Related terms
American Option · Asian Option · Barrier Option · Basket Option · Butterfly Spread · Calendar Spread
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