Bounding Implied Volatility from Wide Option Bid-Ask Quotes

Summary

The document raises a practical valuation problem in an illiquid options market: wide bid-ask spreads across strikes make a single option price, implied volatility, and volatility skew difficult to estimate. It provides an example snapshot for a call and put at the same strike, with the underlying price and interest-rate assumption, then asks whether mathematical rules can produce minimum and maximum fair-value or implied-volatility estimates from the quoted prices.

The material is a question rather than a proposed method or worked solution. It points to the need to distinguish a quoted executable range from a model-based fair-value estimate, and to consider how option prices across strikes constrain a coherent volatility surface. However, it does not specify an option-pricing model, additional market inputs, arbitrage constraints, or a procedure for combining quotes. The example therefore frames the estimation challenge but supplies no evidence that any particular bound or skew can be recovered from the quoted spread alone.

Key ideas

• Wide bid-ask spreads can leave option prices and implied volatilities poorly determined.
• The example asks whether bid and ask quotes can define lower and upper fair-value estimates.
• Cross-strike quote uncertainty complicates estimation of a volatility skew.
• The document poses the problem but does not provide a pricing model or bounding procedure.

Tags

# Pricing options and bid-ask spread


# Pricing options and bid-ask spread












Consider a non-liquid option market with a wide bid-ask spreads across all strikes.

Spot: \$52

A snapshot of the \$50 strike shows:

```
      Bid - Ask
Call: 2   - 4.5 
Put:  0.5 - 3.5
```

Assume 0% interest.

Is there a set of rules or a model that could minimize the range of possible IV's by entering the option's bid/ask prices?

because these options have a very wide spread and their last price changes sporadically i cannot achieve one appropriate fair value/IV for each option, and as i have mentioned, it's applies to all strikes and therefore i'm incapable of forming a skew. so my question is if there's a math way to obtain min&max fair value outcomes for each option?

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.