How Does High Market Volatility Impact the Bid-Ask Spread of Out-of-the-Money Options?

High market volatility typically causes the bid-ask spread of out-of-the-money (OTM) options to widen. Market makers perceive higher risk in quoting OTM options during volatile periods because the probability of the option suddenly moving in-the-money increases dramatically.

To compensate for this elevated risk and the difficulty in accurately pricing the option, market makers will increase the difference between their bid and ask prices.