Why Strangle Volatility Spreads Can Exceed ATM Spreads

Summary

The document raises a question about option market quoting: a book states that a strangle’s bid-offer spread expressed in volatility terms is usually wider than the at-the-money spread for the same expiry. The proposed explanation is that options struck away from at-the-money have lower vega, the sensitivity of option price to volatility, and the question asks why that sensitivity should affect the quoted spread in volatility units.

No answer, market data, or derivation is included, so the claim remains an attributed rule of thumb rather than a demonstrated result. In general, translating a price spread into volatility points involves dividing by vega; lower vega can therefore correspond to a larger volatility-equivalent spread for a given price spread. The excerpt itself does not discuss other influences such as liquidity, quote conventions, or strike-specific market conditions, so it does not establish that lower vega alone determines actual strangle spreads.

Key ideas

• The document asks why strangle bid-offer spreads in volatility terms are often wider than ATM spreads.
• It attributes the difference to lower vega at strikes away from at-the-money.
• Vega measures how much an option’s price changes as implied volatility changes.
• Converting a price spread to volatility units depends on the option’s vega.
• The excerpt provides no evidence that vega alone explains observed market spreads.

Tags

# Volatility spread of Strangle


# Volatility spread of Strangle












It's written in a book by Giles Hewitt : " The bid-offer spread quoted on a Strangle in volatility terms will usually be wider than the ATM spread to the same maturity because strikes away from the ATM have less Vega". link

Vega is sensitivity of option price to volatility. Why should Vega affect the vol spread?

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