How Does Supply and Demand for Options Affect Implied Volatility?

Implied volatility is heavily influenced by the supply and demand dynamics of the options market. If there is high demand for an option, particularly for downside protection like put options during market uncertainty, buyers will bid up the price.

This increase in the option's market price, when fed back into the pricing model, results in a higher implied volatility. Conversely, if there is an oversupply of options or low demand, the option prices will fall, leading to lower implied volatility.

It reflects the market's collective appetite for risk.