A 10-delta one-month put is 0.12 bid, 0.15 offered, and its vega is 0.015 per volatility point. How wide is that market in volatility terms, and what does the comparison say about quoting wings in premium?

A 10-delta one-month put is 0.12 bid, 0.15 offered, and its vega is 0.015 per volatility point. How wide is that market in volatility terms, and what does the comparison say about quoting wings in premium?

Approach: Divide the premium width by the vega to convert the quote into volatility points, then compare that width against a typical at-the-money quote in the same units.

2 volatility points. The bid ask spread in premium is 0.15 - 0.12 = 0.03 and the vega is 0.015 per point, so the market is 0.03/0.015 = 2.0 volatility points wide, against perhaps 0.5 points in the at-the-money option of the same expiry. Three cents looks tight in premium and is very wide in the coordinate the risk actually lives in, because a wing option has almost no vega and its implied volatility therefore swings several points on a one-tick change in price. That is also why a fitted surface should never be marked off the last traded price of a far wing, and why an implied volatility computed from a 0.01 wide market on a 0.05 option is close to meaningless. A desk quoting wings works in volatility, then converts to premium at the end, so the tick size is a constraint on the quote rather than the basis for it.

Follow-up: The put ticks to 0.16 on a single lot trade. How much of the surface should you move and how would you decide?

Key concepts: vega, bid ask spread, implied volatility, wing options.