Filtering Stale or Illiquid Options in Implied Volatility Surfaces

Summary

The note addresses discontinuities in an implied volatility smile built from options data, including contracts with no reported trading volume and varying open interest. It identifies two candidate filters: omit options with no volume, and exclude contracts whose bid–ask spread is too wide. These filters aim to reduce the influence of stale or unreliable quotes when comparing models of the underlying asset’s movement.

The recommendation is intentionally conditional: the appropriate filter depends on the purpose of the analysis. Zero volume does not by itself establish that every available quote is unusable, and open interest and liquidity measures provide different information. The answer gives no threshold for acceptable spreads, freshness rule, or empirical comparison of filtering choices. Researchers would need to define criteria suited to their data and modeling objective, then account for how exclusions affect the range of strikes and maturities represented in the resulting surface.

Key ideas

• Options with no trading volume may be considered for exclusion when constructing an implied volatility surface.
• Contracts with excessively wide bid–ask spreads may also be filtered out.
• Filter choices depend on the analysis objective, and the note provides no universal thresholds.
• Removing contracts can change which strikes and maturities are represented in the surface.

Tags

# Filter options used in the construction of implied volatility surface


# Filter options used in the construction of implied volatility surface












Currently trying to model the IV Surface using the APPL options, to compare how different models of the underlying move the IV Surface. However, after getting the data, I've seen that some option contracts have $Volume=0$ but $Open\hspace{0.2cm} interest>0$. For a few of them, both metrics are zero. When plotting the IVs for a given time $t=T_n$, the volatility smile is discontinuous (large gaps) for some contracts.

Is there any filter to deal with this issue. I assume that absence of volume means no trading at all, and the last price might be very old to keep up with the other recently traded contracts.

## Answer by Ezy (score -1)

https://quant.stackexchange.com/a/43170

You can filter the options with no volume or too wide spread, it entirely depends what you are trying to do

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