Samuel L456 Cooper

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What is volatility smile in options trading?

The volatility smile refers to the pattern where implied volatility is higher for deep in-the-money and out-of-the-money options compared to at-the-money options. In forex options, this reflects market participants pricing higher risk for extreme moves. For example, traders may pay more for out-of-the-money puts as insurance against crashes. The smile provides insights into sentiment—if skewed heavily toward puts, it suggests bearish fear. Institutions monitor volatility smiles to adjust hedging strategies or spot potential imbalances. Retail traders can use it to gauge risk appetite and position accordingly. However, interpreting volatility smiles requires experience in derivatives.