How to read an options volatility smile

What the smile tells you

The volatility smile — the curve of implied volatility across strike prices for a single expiry — is one of the most information-dense objects in finance. Its shape reveals how the market prices tail risk, directional bias, and uncertainty.

Equity smiles: the protective put

Equity options typically show a downward-sloping smile (often called a skew). OTM puts have higher IV than OTM calls. This reflects demand for downside protection — portfolio managers buying puts to hedge.

FX smiles: the true smile

Currency options often show a genuine U-shaped smile. Both deep OTM puts and calls have elevated IV. This reflects the fact that currencies can move sharply in either direction.

Commodity smiles: the supply shock

Commodity options often show an upward skew — OTM calls have higher IV than OTM puts. This reflects supply-shock risk: oil can spike 50% but rarely halves overnight.