What does the shape of the volatility smile reveal about put options on equity?
A. Options close-to-the-money have the lowest implied volatility
B. Options deep-in-the-money have a relatively high implied volatility
C. Options deep-out-of-the-money have a relatively high implied volatility
D. All of the above
C
The volatility smile shows that low-strike-price options have high implied volatilities relative to at-the-money options. High-strike-price options have low implied volatilities relative to at-the-money options. Out-of-the-money put options have a low strike price. Hence C is correct.
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