Volatility smile
The curve implied volatility traces across strikes. If it were flat the model would be enough; that it is not is what has to be interpreted.
In the chapter
What is really being bought and sold
From the same chapter
- Implied volatilityThe move the contract's price takes for granted between now and expiry. It is not a forecast: it is what you would have to believe for that price to be fair.
- Realised volatilityHow much the underlying ACTUALLY moved. Comparing realised with implied is the central question for an option seller: is the expectation expensive?
- IV RankWhere today's implied volatility sits within its range over the last year, from 0 to 100. It tells you rich or cheap FOR THAT asset, not in absolute terms.
- IV PercentileWhat share of days in the last year had lower implied volatility than today. More robust than rank when there has been an isolated spike.
- Volatility skewFar puts trading at higher implied volatility than equivalent calls. It is the price of fear: falling scares more than rising.
- Term structureHow implied volatility changes across expirations. When the short dates run above the long ones, the market expects an immediate scare.
- Volatility crushThe sharp drop in implied volatility right after a scheduled event. It explains how you can call an earnings move correctly and still lose.
- VIXThe index summarising 30-day implied volatility on the S&P 500. It rises when the market pays up for protection, so it usually moves opposite to the index.