Why there different implied volatility for different strike prices?, Can plz someone explain to me? I am pretty new to options. Thanks in advance
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2$\begingroup$ Search for the keyword "volatility smile" and you'll find tons of explanations. For example: en.wikipedia.org/wiki/Volatility_smile. In your above screenshot however, I have to say that the implied vols look rather erratic. $\endgroup$– LocalVolatilitySep 11, 2016 at 22:11
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1$\begingroup$ Some of your options have volume of literally 1 contract. It is not clear when that single trade occurred, but it might be many hours old, which could lead to inconsistent IVs when using more current data the underlying. Also note the big bid ask spreads $\endgroup$– Alex CSep 12, 2016 at 1:22
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2 Answers
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Implied volatility will depend on the price the option is trading at. If more people buy a certain strike than another, or the given option is more difficult to hedge then the implied volatility will not be the same due to a different price. A simple example would be a stock trading at 10000 USD, and a call option expiring in 30 days with a strike of 12000 USD. Lets also say there is a 20% expected volatility at that time. While there is is a very small chance of the strike being hit, no one in there right mind would expect the strike to be hit and thus no one would buy it. So the fair value would be about 0.1 USD, but because pretty much no one would buy this option it is likely to trade at a lower price maybe even 0 USD and thus implied vol woul be lower or even 0%. The opposite is possible as well, the price of a specific contract could rise due to more investors buying that specific strike than others. As some people mentioned volatility skew is something you may want to read more about.
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Every line in the market in your example defines a different option (with a strike, maturity and call/put flag). Everyone of this function has a different price given by the market.
What we call implied volatility is just the number you have to input as $\sigma$ in the Black Scholes equation to get the price which is traded in the market.
