I know there is no way of determining it until after the fact. However, if your model happens to price IV better than the competition (ie. your volatility forecast is more accurate and nearer to the realised volatility), wouldn't you gain an edge over other participants?
It's not a matter of right or wrong implied volatilities, it's a matter of relationships between the implied volatilities of different options. These relationships can become temporarily distorted. If you can find such distortions, you may be able to exploit them by doing a spread. Spreading volatilities is not as good as arbitraging volatilities, but it's the best you can do these days.
my option arb experience involved exploiting price differences between exchanges. not sure if this is still available. surf
Both Charles Cottle and Sheldon Natenburg's books explain synthetics, and hence, option arbitrage opportunities. The market's efficiency has eroded most of the opportunities in these trades, but understanding these relationships is very beneficial.
i am interested this in myself. not this is very math intensive i am told. maybe thats why hedgies hire quants to do these sort of stuff.
Is IV the only variable when pricing options that is subjective in nature? In other words, are all the other factors in option pricing agreed upon between market participants, leaving IV as the only variable subject to personal interpretation/calculation?