I am analysing option-implied RNDs and risk preferences for my masters thesis, so forgive me if I sound like a beginner in derivatives.

I use WRDS to download my historic options data. I am looking at SPX European Friday-settlement options with τ = 5 weeks, looking at a month by month nonoverlapping data. I'll give an example:

Information Date: Dec 13th, 2017

Exercise Date: Jan 19th, 2018

Index Close: 2662.85

Strike: 1000

Average of bid and ask for this strike: 1663.50

Volume: 250

Implied vol: 1.3931

The next available strike with volume > 0 was K = 2000, with strikes above having reasonable gaps and volumes. This is not the only dataset where I see this. Is this normal and is it okay to include it in the dataset to build the RND? I assume the answer will be related to trading fees, but just want someone with more knowledge to confirm.


  • $\begingroup$ As you can see when a Call is this deep in the money the Implied Vol is not reliable. So I would not use it. But a bigger question is WHY people trade such an option. And that I don't know. $\endgroup$ – noob2 Aug 17 '20 at 16:23
  • $\begingroup$ I’m just guessing but does it have anything to do with var swap hedging/replication? $\endgroup$ – oronimbus Aug 17 '20 at 18:53
  • $\begingroup$ oronimbus: trading deep ITM call for tail hedge seems to be very unlikely $\endgroup$ – CABLE Aug 18 '20 at 5:41
  • $\begingroup$ thank you everyone $\endgroup$ – br0323 Aug 18 '20 at 9:38

I'm also currently working on analyzing option-implied RNDs. I'm no expert but a couple of comments:

  • In addition to volume, you want to look at the open interest of the different strikes to conclude which prices are reasonable.
  • Humans like round numbers so especially for deep OTM strikes you will see the bulk of open interest located at nice numbers.
  • Deep OTM options tend to be more liquid than deep ITM options so when constructing the vol smile for the RNDs, you can use OTM call and OTM put IVs.

Was the put of that strike also traded? If yes, then maybe somebody entered a box position to lock in the risk-free rate. If no, I don't know...


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