What is a Volatility Smile?
The volatility smile shows how implied volatility varies across strike prices. Understanding the smile helps identify mispriced options and optimal strikes for strategies.
Types of Volatility Patterns:
- Smile: Higher IV at extremes (common in FX)
- Smirk/Skew: Higher IV for OTM puts (equity markets)
- Flat: Uniform IV (rare, indicates efficiency)
Trading the Volatility Smile
Identify Opportunities:
- Steep skew → Sell put spreads
- Flat smile → Calendar spreads
- Inverted skew → Unusual, investigate
Key Metrics to Monitor:
- 25-Delta Risk Reversal
- ATM vs OTM IV spread
- Term structure slopes
Analyze Volatility Smile in Real-Time
Our Volatility Lab shows smile, surface, and term structure for any ticker.
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