What Is the Relationship between Implied Volatility and the Bid-Ask Spread? ⎊ Path

What Is the Relationship between Implied Volatility and the Bid-Ask Spread?

Implied volatility (IV) generally has a direct relationship with the bid-ask spread. Higher implied volatility indicates greater uncertainty and higher risk for the market maker, as the option's price is expected to fluctuate more.

To compensate for this increased risk, market makers will widen the bid-ask spread to increase their potential profit margin. Therefore, options with very high implied volatility, such as those around an earnings announcement, typically have wider spreads than those with low IV.

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Glossar

Implied Volatility

Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.