This might be silly or basic question but I'm wondering how do a market makers do decide on fixing an option IV on certain level ? how do they do theirs calculations ? Thank you


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They do not calculate it, they set it at a market clearing level based on supply and demand. It is similar to the way equity market makers set the price of a stock: a lot of buyers => raise the stock price (or the IV), a lot of sellers => lower the stock price (the IV).

For a new option, not previously traded, they might look at the IV of "comparable" stocks and the historical vol of the stock and make some adjustments from there (example: earnings announcement coming up => raise the IV).

It involves judgement and your skill at doing it will determine how good an option marketmaker you are.


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