Yes, I saw it happen just last month in USG. When it spiked up huge one day, the deep OTM puts actually closed higher.
I was trading options on the NYFE ( futures branch of NYSE) I guess in 1983 and there was a quick rally and the OM puts actually INCREASED in value because people were scrambling out of a large number of short spreads. Nickel puts went to 25c. Lots of smart guys got hurt. I guess this is why you can never say never.
Understand the number of times that something different than the norm will happen, like you said don't ever say never which I don't think I did. But trying to mention what usually happens to give a little background to the person who asked the question and mentioned they were a newbie. The times that you have seen this happen, would you say it was because of a mm trying to price expensively because of uncertainty, and this shows up as an increase in IV?
In this case it was simply an illiquid market. Most of the MM's were short out of the money puts (easy money, the market was going up) and they themselves were scrambling to get out. If you were a MM today for one of the options and one of the megafunds or Buffett came around with an order for 1000x more than you normally handle what would you do? Raise your offer, take it all and try to lay off? or just take the minimum required and let the spread go wide open. Some people (even yourself, or some people in your company on other's behalf) may bid the puts just to get out on the straddles. What if there was a communication link faliure and you could not lay off? After you filled the order you would realize you were stuck and you would try to cover at any price. I don't see this happen in idex options as much as I could see it in futures.
Somewhat relevant to this discussion: In my paper trading via Optionsxpress, I bought GOOG 320 June call (just for observation purposes) on Monday. Today, GOOG is up 5 points, but the call has lost 30% of value just today. My guess is becaue IV has dropped. Kinda interesting to me because one would think that as an option goes more ITM its value should increase, but here, mostly of becaue of drop in IV (and to a lesser extent theta) my option has dropped in value.
Exactly, and if you really want to hear a giant sucking sound, buy OTM puts that are IV pumped ahead of some event that even when the outcome is in your direction, your puts go down.
^^^^^^^^^^^^^^^^ Sure ,as an OTM option goes in the direction of ITM it can be profitable; however you may have noticed OTM are much more leveraged than ITM, ATM,ITM. For front month OTM /JUN, picture snow on a polar bear reaction to summer sun temperature rising from 86 degrees , heading towards Miami heat on the 4th of July.
Follow up question: why do options of the same underlying/same expiration but at different strike prices have different IV? I thought IV was for underlying - why would it differ based on strike price?