Management Dynamics

Neha Jain , Neha Sharma , Reenu Agarwal , Salim Akhtar , Sonia Lalchandani

Abstract

If James Taylor had been an options trader, he might well have not written that second line. Options "smile" at traders, but that smile is not a source of happiness. It is in fact a source of considerable confusion and misunderstanding. In this paper, we explore how this confusion manifests in the pattern of different implied volatilities for different options on the same stock, a pattern commonly known as the volatility smile.

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