Volatility Smiles
Volatility Smiles
Volatility Smiles
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‣ Plotting the implied volatility against the strike-price revealsa volatility “frown”.‣ The volatility implied from an option with a strike-price of$50 will overprice an option with a strike-price that is furtherfrom being at-the-money.‣ Remember: traders use volatility smiles to allow fornon-lognormality.The volatility smile defines the relationship between theimplied volatility of an option and its strike price. <strong>Volatility</strong> Surfaces‣ Implied volatilities are frequently used to quote the prices ofoptions.9