Risk glossary

 

Volatility smile

If the implied volatility of an option is plotted against its strike on a graph, the chart is typically shaped like a smile (less often a frown). This curve is known as the volatility smile. It may reflect the fact that out-of-the-money events are more common than geometric Brownian motion would predict. This leads to extra value for out-of-the money options.

* see also implied volatility

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