Why Short-Dated Options Can Show High Implied Volatility

Summary

The document offers several explanations for unusually high implied volatility in near-term options, including contracts on stocks without imminent earnings. One possibility is an upcoming sector-wide event that makes short-dated options useful as high-gamma, leveraged positions. A separate pricing effect can occur in far out-of-the-money options: when their theoretical value is tiny, minimum quote increments may leave the displayed price relatively high. Because short-dated options have little vega, converting such a price into implied volatility can produce an outsized estimate.

A second answer points to a broader premium in short-term at-the-money options, including liquid index options, where penny-quote effects and company-specific catalysts are less persuasive explanations. It suggests that traders may pay for inexpensive gamma to speculate or hedge longer-term exposure. These are explanations rather than a tested model, and the discussion does not quantify how much each factor contributes. Implied volatility inferred from a low price or wide quote can also be sensitive to quote quality and market conditions.

Key ideas

• Sector events can increase demand for short-dated options even when a company has no near-term earnings announcement.
• Short maturities provide high gamma, which can appeal to traders seeking leveraged short-term exposure.
• Minimum quote increments can make far out-of-the-money options appear expensive relative to theoretical value.
• Low vega near expiration means small option-price changes can imply large changes in calculated volatility.
• Short-dated at-the-money options may carry a premium because they offer relatively inexpensive gamma for speculation or hedging.

Tags

# Why closest weekly options have enormous Implied Vol.


# Why closest weekly options have enormous Implied Vol.












I know weekly expiration cycle's Implied Vol. explodes prior to earnings, that is due to Theta and Expected move. But why does it happen on stocks that don't have earnings? ( let's say earnings will be in 60 days)

## Answer by RiskyScientist (score 1)

https://quant.stackexchange.com/a/27786

One reason short term IVs pop could be a sector-related factor, such as an important number coming out that affects for example financial stocks. Short term options have really high gamma, so can make for a good short term leveraged play.

Another factor might be that deep out of the money options often get a bid of nearly zero, but people don't like offering teeny options for nothing, so they might just use a minimum price level for the offered price like 0.01, even if this is far higher than a rational value would be, based on a "sensible" implied vol. The implied vol calculator probably is then taking a mid-market value, and as short term options have very low vega, you need a very high implied vol to get to that mid-market price.

## Answer by onlyvix.blogspot.com (score 1)

https://quant.stackexchange.com/a/35429

RiskyScientist answers make sense, but I want to provide a counter-example and an alternative, more systematic answer.

If you look at ATM weeklys on SPY/SPX you will also see volatility rises into expiration as well. This behavior cannot be explained by sector-related, or any idiosyncratic reason. Also ATMs are highly liquid, and are prices far above 0.01, so RiskyScientists second reason would also not apply here.

The reason why there's an IV premium for short-term options is because they are cheap in $ - so you can get a lot of gamma for little money, either for speculation or to hedge something longer-term flow for cheap.

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