ANSWER

option smile

A volatility smile is a common graph shape that results from plotting the strike price and implied volatility of a group of options with the same underlying asset and expiration date. The volatility smile is so named because it looks like a smiling mouth. Implied volatility rises when the underlying asset of an option is further out of the money (OTM) or in the money (ITM), compared to at the money (ATM). The volatility smile does not apply to all options.

DETERMINANTS OF OPTION SMILES

Three main determinants make up an option's smile value are:

Strike price relative to the underlying asset;

A strike price is the set price at which a derivative contract can be bought or sold when it is exercised. For call options, the strike price is where the security can be bought by the option holder; for put options, the strike price is the price at which the security can be sold.

the time until expiration or expiry;  -

Time decay is the reduction in the value of an option as the time to the expiration date approaches. An option's time value is how much time plays into the value—or the premium—for the option.The countdown for time decay begins as soon as the option is initially bought and continues until expiration.

the expected volatility in the underlying asset during the life of the option.

Volatility, in relation to the options market, refers to fluctuation in the market price of the underlying asset. It is a metric for the speed and amount of movement for underlying asset prices. Higher implied volatility indicates that greater option price movement is expected in the future

REMEDY

This can be useful if seeking an option that has lower implied volatility. In this case, choose an option near the money. If looking for greater implied volatility, choose an option that is further ITM or OTM. Remember, though, as the underlying moves closer or further away from the strike price this will affect the implied volatility. Therefore, maintaining a portfolio of options with a specific implied volatility will require continual reshuffling.