Stock option pricing volatility smile

Volatility smile is a fairly advanced options concept.

The volatility smile is an observed pattern in which at-the-money ATM options tend to have lower implied volatilities than in- or out-of-the-money OTM options. In essence, a volatility smile is a form of the options pricing concept volatility skew. The volatility smile pattern results from the probability of extreme moves. For a better idea of the concept, take a look at the pattern below….

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You can see that implied volatility is near its lowest point when the underlying is ATM strike price. Volatility smiles tell us the demand is greater for options that are in-the-money or out-of-the-money.

For example, a quantitative analyst will first calculate the implied volatility of liquid vanilla basic options.

Marcus Haber is the co-editor of Options Trading Research and boasts well over a decade of real-life options experience. Learning from some of the biggest names options call put straddle the business, Marcus has served as an Options Strategist for a number of firms and was also appointed to the Options Advsiory Board with Pershing, a branch of the Bank stock option pricing volatility smile New York.

Volatility smile - Wikipedia

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Volatility Smile

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