Consider a non-liquid option market with a wide bid-ask spreads across all strikes.

Spot: \$52

A snapshot of the \$50 strike shows:

      Bid - Ask
Call: 2   - 4.5 
Put:  0.5 - 3.5 

Assume 0% interest.

Is there a set of rules or a model that could minimize the range of possible IV's by entering the option's bid/ask prices?

because these options have a very wide spread and their last price changes sporadically i cannot achieve one appropriate fair value/IV for each option, and as i have mentioned, it's applies to all strikes and therefore i'm incapable of forming a skew. so my question is if there's a math way to obtain min&max fair value outcomes for each option?

  • $\begingroup$ Can you please elaborate what you are looking for. It is very unclear to me what you are asking. $\endgroup$ – Matthias Wolf Sep 24 '13 at 3:46
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    $\begingroup$ @MattWolf If he uses the option's ask price, he'll obtain a particular implied vol. If he uses the option's bid price, he'll obtain a different implied vol. He's asking how to reconcile this for illiquid options that have wide spreads. $\endgroup$ – chrisaycock Sep 24 '13 at 20:10
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    $\begingroup$ In such a situation just use three curves. Mark one on the ask (as that is your buy curve), one on the bid (your sell curve) and one on the middle as a theoretical curve. The first two curves give you proper mark-to-liquidation valuation for a portfolio while the latter will give you an indicative mark-to-market. $\endgroup$ – luckylwk Sep 25 '13 at 9:01

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