Volatility Smile
A Volatility Smile is the U-shaped curve where both deep out-of-the-money calls and puts carry higher implied volatility than at-the-money options.
What Volatility Smile Means
A Volatility Smile appears when implied volatility is plotted against strike price and forms a U shape: IV is lowest near the at-the-money strike and rises on both sides as strikes move further out-of-the-money. Both deep OTM calls and deep OTM puts trade at elevated IV, which curves the line up at both ends like a smile.
This contradicts the simple Black-Scholes assumption of a single, constant volatility across strikes. The smile exists because real markets have fat tails — extreme moves happen more often than a normal distribution predicts, so tail strikes are bid up.
Smile vs Skew
A symmetric smile values both tails equally. A skew is a lopsided smile, with one side (usually the put side in equity indices) much higher than the other. Index options typically show a skew more than a clean smile, while currencies often display a more symmetric smile. Both describe the same idea — IV varies by strike — but the shape differs.
Smile in the Indian Market
Nifty and BankNifty usually lean toward a put-heavy skew rather than a symmetric smile, but the upturn on far OTM strikes is still visible, especially around expiry and big events. Recognising the smile prevents mispricing tail strikes when building wide iron condors or strangles. Quintal Mind's live strike-by-strike IV makes the curve's shape obvious.
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