Volatility Smile

A volatility smile is the graphical pattern observed when implied volatility (IV)—extracted from options pricing—is plotted against strike prices for options of the same expiry. Rather than being flat (as the Black-Scholes model assumes), the resulting curve typically forms a U-shaped smile, with implied volatility being highest for deep in-the-money and deep out-of-the-money options, and lowest for at-the-money options. This pattern reflects market participants' demand for tail-risk protection and the reality that large price moves occur more frequently than a normal distribution predicts. In Indian equity options, volatility smiles and skews are closely monitored by professional options traders to assess relative value and structure positions.