What is volatility skew or smile and what do they imply for option pricing?

• A. A skew/smile describes how implied volatility changes with time to expiration.
• B. A skew/smile describes how implied volatility varies with moneyness (strike); often lower for deep in-the-money and higher for out-of-the-money; implies Black-Scholes with constant vol misprices options.
• C. It implies volatility is constant across strikes.
• D. It is the same as historical volatility.

Answer: (B)