I have call options on the FTSE100strikes [5200, 5800, 5900, 6500, 6700]with prices [602, 114, 75, 3, 0.5]this is on the 21st March 2011 when the FTSE is at 5720, with the options expiring in 3 months time.now using r = 0.005 and T=3/12I compute the implied vol's to be[0.24, 0.163, 0.159, 0.124, 0.097]my question is...Where is the volatility smile? surely the implied volatility should go up either side of the at the money option? but as the calls get further out of the money the implied vol drops, I though the smile makes it rise?(Im sure theres an obvious answer, sorry for being so dumb this afternoon)(my numbers above are a little rough)

Few markets consistently exhibit a nice symmetrical smile.The generalised rule of thumb is:Equity Index markets : Put Skew or -ve Vol skew => Otm Puts > ATM > OTM Calls ie a hockey stick shape with vol on low delta calls starting to riseBonds, Commodities & Vix : Call Skew or +ve Vol Skew => OTM Put < ATM < OTM CallsG7 Currencies : Approx symmetrical vol smile

A volatility smirk (reverse skew) is common for long dated equity options and index options. Try reading up on smile vs smirk.

So this is the chart of the implied volatility, is this the 'smirk'?Also when saying 'long dated' is 3 months long? how short is short 1 month? 1 week?Thanks for your reply

Yes, that's the skew/smirk. I don't know about FTSE, but for the SPX you can usually acquireat least bids and offers for deep OTM calls that show the smirk "turning up" again, at least a little.This gives more confidence in models that suggest that what you are seeing is, roughly,the left-hand-side of a parabola-type shape that bottoms at a non-zero implied vol and then turnsup again far to the right. The chance of a 30% rally in 3 months is non-negligble -- try to get some quotes for that. You might want to look at the short-dated SPX skew, also. Looking at the May 21, 2011 expiration.With SPX at 1341, I see the (call) implied vols bottoming at around K=1385 and visibly turning up out to K=1435,beyond which there are no bids.

Thanks Hansi for the reply, and thankvyou Alan for your insight and suggestion, I'll get some data for the SPX and have a look.