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Interpreting Implied Volatility from Option Bid and Ask Quotes

Article Quant Q&A · Author: Sebastian
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Summary

The document asks whether the single implied volatility shown alongside an option’s bid and ask prices is calculated from either side or from a representative price. The accepted response says that data sources usually calculate it from the bid–ask midpoint, so the displayed value should generally be read as a mid-quote implied volatility.

It also cautions that midpoint-based values may be unreliable for illiquid contracts, particularly far out of the money or with long expirations. Quotes on both sides can be misleading, so the displayed volatility is not necessarily an executable market price or a dependable estimate of fair value. The note gives a common convention and a practical caveat, but does not establish that every vendor follows the same convention; users should confirm how a particular source computes its field when precision matters.

Key ideas

  • A displayed option implied volatility is usually computed from the bid–ask midpoint.
  • The quoted volatility may not correspond to an executable bid or ask.
  • Midpoint values can be unreliable for illiquid options, including far out-of-the-money and long-dated contracts.
  • Market data vendors may differ, so their calculation convention should be confirmed when needed.

Tags

OptionsVolatilityMarket microstructureDerivatives pricing
Full text
# is implied volatility derived from the option bid quote or the option ask quote?


# is implied volatility derived from the option bid quote or the option ask quote?












I got SPX option prices from three different market data sources. In all of them, I can see bid and ask quotes. However, there is only one implied volatility. Does this implied volatility correspond to the bid or to the ask quote? or maybe the mid?

As a side note: the most logical thing to do, would be to ask the sources directly but I can't. Because of the way the option information is presented (it seems to be very similar between the three sources), I think it may be a convection, that's why my question here.

## Answer by Si Chen (score 1, accepted)

https://quant.stackexchange.com/a/68173

They are usually "mid" of bid/ask. For illiquid options (OTM, very long dated) I wouldn't necessarily trust either the bid or offer. Traders are known to paint the market on both sides.

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