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I have smile data which looks like this, enter image description here

but after converting the vol points to prices using black's model, i got something like this, enter image description here

is this expected?

I was expecting the shape of the smile to be retained. What am I missing?

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  • $\begingroup$ Are your options (puts and calls) out-the-money or in-the-money? $\endgroup$ – Daneel Olivaw Jun 10 '17 at 13:46
  • $\begingroup$ they are all out of the money $\endgroup$ – Danny Jun 10 '17 at 14:41
  • $\begingroup$ There is something I don't understand in your graphic: the 25d call is situated before the 10d call, but doesn't the 25d call have a greater strike? $\endgroup$ – Daneel Olivaw Jun 10 '17 at 15:38
  • $\begingroup$ If they are all OTM, they must all be inferior to the ATM price so at least that is consistent. $\endgroup$ – Daneel Olivaw Jun 10 '17 at 15:39
  • $\begingroup$ From the ATM point, as we move more and more to the right, we go more and more otm, so it should be 25d followed by 10d and so on $\endgroup$ – Danny Jun 10 '17 at 23:11
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if you use put-call parity to make them all calls, they should be monotone decreasing, and convex. I wouldn't expect them to look like a market smile.

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  • $\begingroup$ yes actually that's correct, I have verified it also. $\endgroup$ – Danny Jun 11 '17 at 10:06
  • $\begingroup$ i think the point is that even though the smile shows higher volatility the more we get otm, the prices are still supposed to be sloping downwards from atm onwards (going to the right, if we consider the call prices). the smile just says that prices are slightly higher than what we would expect from black scholes, but it is not the case that prices should also retain the smile shape. $\endgroup$ – Danny Jun 11 '17 at 10:12

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