The Birth of the Volatility Smile

Erik Kobayashi-Solomon

December 12, 2014

Source: The Framework Investing (2014, McGraw-Hill) In Chapter 7 of The Framework Investing, I write about the overcharging for out-of-the-money (OTM) options that leads to implied volatilities being much higher than those for at-the-money (ATM) options. This effect is known as the Volatility Smile (a.k.a. Volatility Smirk, Volatility Skew). Another way to think about the …

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