Why is implied volatility higher for OTM?

The closer an option is to expiring, the more volatility is needed to reach OTM strike prices. That means the IV increases because the underlying stock would need to move farther and faster to hit the OTM strike price before the expiration.

How does implied volatility affect put options?

As expectations rise, or as the demand for an option increases, implied volatility will rise. Options that have high levels of implied volatility will result in high-priced option premiums. Conversely, as the market’s expectations decrease, or demand for an option diminishes, implied volatility will decrease.

Is the implied volatility of one option class higher than the other?

You might expect all options over the one stock to have the same implied volatility. However, implied volatility typically varies across different strike prices. Options with lower exercise prices generally have higher implied volatility than options with higher exercise prices.

Is implied volatility same for put and call?

Calls and puts should have the same implied volatility. The implied volatility should describe that portion of the options price attributable to the movement in the stock, ie the implied volatility. The most obvious culprits causing calls and puts to have different IVs are interest and dividends.

What is implied volatility smile?

A volatility smile is a geographical pattern of implied volatility for a series of options that has the same expiration date. The simplest and most obvious explanation is that demand is greater for options that are in-the-money or out-of-the-money as opposed to at-the-money options.

Why does higher volatility increase option value?

When there is downside risk, the buyer of the call option will forego the premium. When there is upside risk, the buyer of the call option will rake in the profits. The same rule applies to put options too. That is why higher volatility makes call options and put options more valuable.