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Volatility surface

The full grid of implied volatilities across every strike and expiration on one underlying; the market's complete view of the distribution of future prices.

Black-Scholes assumes one volatility for everything. Real markets quote a different implied-volatility for every strike and every expiry, and plotting them produces a surface with two visible features: volatility-skew across strikes and volatility-term-structure across time.

The surface is the working object for anyone trading volatility rather than direction. Positions are described by where they sit on it, risk is measured by how it can deform, and most professional edge comes from spotting a point that is cheap or rich relative to its neighbours.

Example: XYZ at $50. The 30-day $45 put trades at 31% implied volatility, the 30-day $50 at 25%, the 30-day $55 at 23%, and the one-year $50 at 27%. Those four numbers are four points on the surface, and together they already tell you the skew is steep and the term structure upward sloping.

Related: volatility-skew, volatility-term-structure, volatility-smile, implied-volatility

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

The volatility smile across strikesImplied volatility plotted against strike, dipping near the money and turning up at both ends, more steeply on the downside.Implied volatility32%28%24%20%8090110120Puts below the money cost moreFar calls cost more tooLowest IV near the moneyATM 100Strike price
The volatility smile. Options on the same stock and the same expiry are not priced off one volatility. Strikes near the money carry the lowest implied volatility, and it rises towards both ends — usually faster on the downside, which tilts the smile into a skew.

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