Plot implied volatility across strikes to see how the market prices tail risk.
What is a volatility smile?
A volatility smile is the curve you get by plotting the implied volatility of options against their strike prices for a single expiry. Under the idealised Black-Scholes model this line would be flat, since one volatility should price every strike. In real markets it curves upward at the wings — options far from the money carry higher implied volatility — forming a smile or, more often in equities, a lopsided smirk that reveals how the market prices extreme moves.
Illustrative convex volatility smile across strikes for a single expiry. Values are for demonstration only.
If Black-Scholes were literally true, every option on the same underlying and expiry would share one implied volatility. Markets say otherwise. Plotting implied vol against strike produces a curved line — the smile — that encodes the market's fear of large moves. This tool charts a convex smile across strikes so the shape is clear.
Black-Scholes assumes returns are normally distributed, but real returns have fatter tails: extreme moves happen more often than the bell curve predicts. Traders price this in by paying up for out-of-the-money options that protect against or profit from big moves, which raises their implied volatility relative to at-the-money options. The result is the smile — higher implied vol in the wings, lower in the middle — a direct market correction to the model's thin-tailed assumption.
Equity index options rarely show a symmetric smile; they show a skew or smirk, with implied volatility much higher for downside strikes than upside ones. This asymmetry reflects crash fear — investors pay a persistent premium for downside protection after 1987 taught markets that equities fall faster than they rise. The steepness of this skew is itself a tradeable gauge of risk aversion, tracked by indices built specifically to measure it.
Quadesto reads your option chain — strikes and implied volatilities for one expiry — and plots the smile directly, or solves for implied volatility from option prices using a Black-Scholes inversion if you supply premiums instead. You map the strike and IV columns and the curve renders. The smile above is built from a table of strike and implied-vol pairs, and it embeds into options research.
Upload a CSV or connect a live source, and Quadesto renders this exact chart — styled, computed, and embeddable in your reports and newsletters. Free to start.
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