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(1) A measure of the relationship between the implied volatility of options and the strike prices of those options. According to the Black-Scholes option pricing model and its underlying assumption of costless trading, implied volatility should not vary with the strike prices of options. Empirically, however, implied volatilities of options on stocks and stock indexes tend to increase on out of the money options. See Smile and Skew. (2) The tendency of the volatility of an underlying stock or stock index to be inversely correlated with stock price or the tendency of interest rate volatilities to be inversely correlated with the level of interest rates.
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