A diagnostic for spotting bad IV on your platform
A quick diagnostic anyone can run on an options chain to spot when the model is lying to you.
The implied vols you see on these platforms are model output. They depend on how good the pricing model is and how accurate the forward sitting inside it actually is.
Here's the check.
If you see implied vol that's significantly different between the call and the put at the same strike and the same maturity on the same asset, don't believe the number.
Theoretically the implied vol on the call and the put of the same strike should match. That's called put-call parity. It's an arbitrage identity, baked into how the two contracts relate to each other through the forward.
There are two main reasons the IVs can diverge.
One. The bid-offer spread is wide. The mid drifts and one side looks bid while the other looks offered. That's a liquidity artifact. The mid drifted while the surface stayed put.
Two. The bid-offer is tight and the IVs still diverge. That tells you the forward inside the model is wrong. The model is using the wrong borrow cost, dividend assumption, or interest rate to build its forward, and that's distorting the put or the call relative to where they should sit.
Same strike. Same maturity. IVs should match.
If they don't, you've spotted a model issue. The number you're reading is an artifact.
Useful first check before you build a thesis on what the surface is "telling" you.
If you want to find out more about my framework, watch my free masterclass.
Imran
Disclaimer (Your Gains & Losses, Your Responsibility): This content from Options Insight LLC (“Options Insight”) is for educational purposes only and does not provide individual investment advice or recommendations, nor should it be considered an offer to buy or sell any security. All information is general and not tailored to your specific objectives, financial situation, or risk tolerance. Employees of Options Insight may hold positions in the assets discussed. While we use sources believed to be reliable, we are not responsible for errors, omissions, or losses resulting from reliance on this content. Always consult a licensed investment professional.
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