Why Short-Dated Options Can Show Noisy Implied Volatility

Summary

The document explains why options with less than a week to maturity may be excluded from implied volatility analysis. As expiry approaches, an option’s price becomes less sensitive to implied volatility, especially near the money. Consequently, small bid–ask effects can translate into large apparent changes in implied volatility even when the move in the option’s market price is modest.

The answer points to one-day-to-expiry crypto options as an example, where wide spreads can skew calculated implied volatility and make volatility-of-volatility look unusually high. This offers a possible rationale for filtering short maturities, but the document does not establish a universal seven-day cutoff or give a specific filtering rule. The appropriate threshold depends on the analysis and the quality of the option quotes.

Key ideas

• Near expiry, option prices become less sensitive to implied volatility, particularly around at-the-money strikes.
• Small bid–ask distortions can create large apparent moves in implied volatility for short-dated options.
• Filtering options near expiry may reduce noise in implied volatility analysis.
• The suggested seven-day threshold is not established as a universal market rule.

Tags

# Filtering options data


# Filtering options data












I am looking to conduct some analytics with regards to options implied volatility. My advisor mentioned about filtering options with time to maturity of less than 7 calendar days. Is there a particular for that?

Like maybe the options price or implied volatility spikes too much etc.

Happy to provide any additional details.

## Answer by Newquant (score 2, accepted)

https://quant.stackexchange.com/a/76061

It's possible they want you to remove short dated options as the vol of implied volatility increases. In real price terms this isn't visible as much, that's because $\frac{dC}{d\sigma_i}$ decreases with $\sqrt{T}$ for close to ATM strikes.

You see this frequently in 1DTE options in crypto where trades go through at ridiculously high vol of vol but is actually just a function of the bid/offer spread skewing the IV.

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

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