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Volatility Smile

Term definition

A Volatility Smile is a pattern observed in the implied volatility of options across different strike prices, where the implied volatility tends to be higher for options that are in-the-money or out-of-the-money compared to at-the-money options. This pattern resembles a smile on a graph plotting implied volatility against strike prices. The volatility smile reflects the market's perception of a higher probability of large price movements for the underlying asset, especially for options with strike prices far from the current market price.

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