The two arguments raised by traders is that, why the shape of a smile and also, why the lowest point in the volatility smile is the implied volatility of the ATM option.
The implied volatility of ATM option, i.e. ATM IV is the lowest because of the very expectation of pricing in little or no movement for the underlying (Nifty, Bank Nifty, etc.), which means low expectation of volatility. Hence the IV is low at ATM, where the underlying is closed to that particular strike price of the options (call and put, both). One should remember that option trader is trying to incorporate the probability of the underlying, reaching close to the strike price, from its current price.
The extremes of the option chain, where the strike prices of options are at quite a distance from the ATM strike price, implies that for underlying to reach there even for a remote probability, the move (swing in prices) has to be large.
Let’s take an example: Nifty is quoting at 18500 and for a move to 19500 in two days, 1000-point transition, which means about 5.4% move in Nifty, in absolute terms. Though the probability or likelihood of this move is low, the expected volatility to achieve this would be much higher. So, for an option to turn from OTM to ITM or ITM to OTM, when its positioned far away from the current price of Nifty, entails discounting a larger expectation for volatility with a small probability of the occurrence of the event.
These two arguments result in volatility being different, at different strikes (call/put), for the same expiry and the same underlying. Hence the result is a curve popularly known as volatility smile or volatility skew.