Volatility Smile
The U-shaped curve that shows the market charging more implied volatility for far-out strikes.
Definition
A volatility smile is the pattern you see when implied volatility is plotted against strike price for options of the same expiry. Instead of being flat, the curve typically dips at the at-the-money strike and rises for both out-of-the-money and in-the-money strikes, forming a U shape that looks like a smile. It signals that the market does not believe price returns are perfectly normally distributed.
Why it matters
The Black-Scholes model assumes one constant volatility for all strikes. The smile is real-world proof that traders price tail risk into wings, charging extra premium for strikes far from spot. Knowing the shape helps you judge whether a particular strike is relatively cheap or expensive, and it feeds directly into how option Greeks behave away from the money.
Example
Imagine an index at 20,000. The 20,000 strike might trade at, say, 12% implied volatility, while both the 19,000 put and the 21,000 call quote nearer 16%. Plotting those points produces a curve that sags in the middle and lifts at the edges, the classic smile. Currency and commodity options often show a near-symmetric smile.
See it live
Compare implied volatility across every strike in real time on TradePulse's live option chain.