Volatility Smile Distortions

The volatility smile is a graph showing the implied volatility of options at different strike prices for the same expiration. A distortion in this smile occurs when the market prices certain strikes with higher or lower volatility than expected, often due to specific supply-demand imbalances.

In crypto, these distortions are common and can signal extreme fear or greed among participants. For instance, a steep skew toward out-of-the-money puts indicates a strong demand for downside protection.

Analyzing these distortions helps traders identify mispriced options and potential market turning points. It is a powerful tool for quantitative finance and risk assessment in the derivatives domain.