volatility smile

Definition

A graphical curve that charts the implied volatility of a group of options, with the same expiration date across various strike prices. The curve (which does represent a smile) shows that the implied volatility is higher as the option goes more In The Money (ITM) or Out Of The Money (OTM). Hence the demand is higher for ITM or OTM options rather than At The Money (ATM) options in the middle (lowest point) of the curve. This curve is commonly seen in the forex and near-term equity options market.
Browse Definitions by Letter: # A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
volatility skew volatility swap