When Option Ask Implied Volatility Exceeds Bid Volatility

Summary

For standard European calls and puts, the document explains why a higher ask price usually implies a higher ask implied volatility than bid implied volatility. The key link is that, holding other inputs constant, these option prices increase as volatility rises, so inverting the price-to-volatility relationship preserves the bid-ask ordering.

The conclusion is conditional on the option having a price that rises with volatility. The discussion notes that some structures, such as a binary contract paying only when a stock stays within a narrow range, can lose value as volatility increases. It also flags bad market data as a reason observed quotes may violate the usual ordering. The answer gives a conceptual explanation rather than empirical tests or a procedure for handling inconsistent quotes.

Key ideas

• For European calls and puts, option prices increase with volatility when other inputs are held constant.
• A higher ask price therefore maps to a higher implied volatility for these options.
• The ordering need not hold for options whose payoff value falls as volatility rises.
• Data errors can also produce an ask implied volatility below the bid implied volatility.

Tags

# for options, is it necessarily true that ask vol must be greater than or equal to bid vol


# for options, is it necessarily true that ask vol must be greater than or equal to bid vol












this rule should be the case for prices, but I'm not sure it's strictly true for iv

## Answer by Rylan (score 4)

https://quant.stackexchange.com/a/81785

For eg European calls and puts, option prices are monotonically increasing functions of vol. Put separately, higher vol always equals higher price. So all else equal, ask price is higher than bid price -> ask vol is higher than bid vol. (Of course there can always be data issues)

Other options may not have this feature, so it wouldn't be the case. (For example if there was a binary option that paid out only if a stock price remained in a narrow range, we should expect this to have a negative relationship with vol)

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