Why Implied Volatility Quotes Compare Option Richness

Summary

The document distinguishes implied volatility from market implied volatility, concluding that the terms generally refer to the same quantity: volatility inferred from observed option prices. It then explains why traders quote options in volatility terms rather than compare their prices directly. Option prices vary with moneyness and time to maturity, so a higher price alone does not show that an option is richer than another.

Expressing prices as implied volatility provides a more useful basis for comparing options across strikes and expiries. The explanation is conceptual and does not give a calculation procedure or market data. Its conclusion that the terms are effectively interchangeable reflects the author’s experience, while the comparison assumes other pricing inputs are held fixed; it does not address volatility surfaces, model choice, or quote conventions.

Key ideas

• Implied volatility is inferred from option prices observed in the market.
• The document treats market implied volatility and implied volatility as equivalent terms.
• Option prices change with moneyness and expiry, which makes raw price comparisons difficult.
• Implied volatility quotes help compare option richness across different moneyness and maturities.

Tags

# what's the difference between market implied volatility and implied volatility?


# what's the difference between market implied volatility and implied volatility?












what's the difference between market implied volatility and implied volatility, how it could be calculated? also what's the quoted implied volatility? thanks.

## Answer by Richi Wa (score 2, accepted)

https://quant.stackexchange.com/a/38218

Where do you find a difference between market implied volatility (IV) and IV? IV is implied from prices. These are usually observed at markets. In my experience this should all be the same.

"quoted implied volatility" is probably an interesting concept. For example with call options comparing prives of calls that are deeper in the money than others and therfore more expensive does not give as more insight than their moneyness.

Quoting implied volatility is a more meaningful measure of richness. A call as well as a put are more expensive the higher the (implied/input) volatility is -everything else being fixed. Summing up: quoting vol instead of prices allows you to compare richness for various levels of moneyness and time to maturity.

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