Choosing Option Implied Volatility Quotes for Volatility Surfaces
Summary
The document considers how to use broker-provided bid and ask implied volatilities and Greeks when building an option volatility surface. It asks whether to take the midpoint, how to handle a missing side, and whether implied volatility values above one indicate a formatting problem. The response emphasizes that the right quote depends on the intended use: a buyer-focused or seller-focused analysis may call for the corresponding side, while a surface used for both sides should account for quote or trading volume information.
When only a bid or ask curve is available, the response suggests extrapolating the available curve. The discussion flags deep in-the-money or out-of-the-money options as a special case but provides no complete rule for filtering them, interpreting unusually large values, or validating the data format. It therefore offers guidance on quote selection rather than a full surface-construction method, and a simple bid-ask midpoint is not presented as universally appropriate.
Key ideas
- Select bid-side or ask-side implied volatility according to whether the analysis concerns buying or selling options.
- For a surface representing both sides, quote and volume information can inform the choice.
- The response suggests extrapolating when only one side of a curve is available.
- The document does not establish a universal midpoint rule or a complete treatment of deep in- or out-of-the-money options.
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Full text
# Extracting IB market data: bid and ask for greeks and IV # Extracting IB market data: bid and ask for greeks and IV I wrote a piece of code to get option chains with volatility and greeks from IB market data. After testing yesteday, it seems to work, but I am surprised of seeing bid and ask for impliedVolatility and every greek. I am guessing that bid_IV and bid_greeks are those associated to the option if priced at the bid value, and the same for ask. When bid or ask is not available, its IV and greeks data are empty. So, if my intention is plotting the volatility surface for diferent strikes and expiration dates: - Shall I get the midpoint between bid_IV and ask_IV? - Whenever bid_IV or ask_IV is not available, should I use the one which is available, or not plotting it? - I am afraid of getting the data with a wrong format. I supposed that IV was a percentile, and therefore would be represented between 0 and 1. But if I go too deep ITM, this value is greater than 1 (specially if I still consider IV when its bid or ask is not available). I know that those options with IV greater than 1 are too deep ITM/OTM, so maybe I could just ignore them since they have little use. But, does this make sense? Is the data right and well formatted, or is this a hint of an error in the data representation when saved to Excel? Thanks ## Answer by adam (score 1, accepted) https://quant.stackexchange.com/a/23206 - It depends on what are you going to use the IV for. Are you selling or buying? If doing both, taking volume/quote into account is sensible - Extrapolate if doing only bid or only ask curve - For deep ITM/OTM
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