How Does the Volatility of the Underlying Asset Affect a Market Maker’s Desired Spread for an Option?

Higher volatility in the underlying asset increases the risk for the market maker who must hedge their position against sudden price movements. To compensate for this elevated risk, they will widen the bid-offer spread on the option.

Conversely, low volatility allows market makers to quote a tighter spread, as the risk of a large, sudden loss is lower.