I don't know what the politically correct word for this is so I'll go with apples and oranges. IV is a function of price. I'd have no issue with "The relationship between PRICE and an OPTION is exactly the same as the relationship between PRICE and a STOCK. A measure of demand." Even tho IV is calculated from price, it's still a stretch for me to think of paying 40 IV's so using IV and PRICE interchangeably bothers me. And since I'm bored, waiting for the market to open, I only have 50 more minutes to waste parsing words
I don't agree. If there's a price, there's an IV. If demand changes price, IV changes. If price doesn't change, IV doesn't change (ignoring the passage of time) but it still exists. If the quote is bogus then the IV is bogus.
If you want to define "demand" as "order flow" then we're not having the same conversation. As most people understand the word "demand," if an option has a bid of 2.56, then there is demand for that option. "No demand" means there is nobody willing to pay anything for the option. In any case, that's how I understand the word "demand," and the definition I assumed in my answer.
Of course, if there's a price, there's an IV. But if there's no demand, there is no price, and therefore no IV. I thought it would be obvious to everyone that no demand = no price. No demand means nobody wants to buy it. If nobody wants to buy it, there is no bid. No bid means no price. If anyone wishes to insist that you can have a bid greater than zero and at the same time no demand, then I'm afraid we're speaking two different languages.
IV and price ARE often used interchangeably. There are markets where option bids and offers are quoted in IV, not price. If you have IB, you can set up the quote screen so it shows bids and offers in either price or IV.
I think you have found/ got a very solid backing on your claims (thanks to IB) with a very scientific manner, disregarding whether they are logical or reasonable or not.
DMO, I'm on your side, so don't take this as criticism. There may not be any 'demand' but market makers are required to post a bid anyway. And for a minimum quantity. Thus, in the real world there is always a demand - even it is is artificial - (except when price is very low and the natural bid is zero). In other words, I agree with what you are saying, but because of the system there is always demand for options. Mark
Are you saying that market makers are required to post a bid greater than zero on every option? If so, that is great news. There are lots of options I'd like to sell for one cent the day before expiration. If they are NOT required to post a bid greater than zero - as I suspect - then there are indeed options with zero demand, and therefore no IV. Posting a bid of zero is no different from posting no bid at all. Anyway, you don't need a MM to post a zero bid. I am at this moment and every moment zero bid for every option in America. If anyone out there wants to give me options for free, let's talk.
Well, obviously the most important IV for the trader is realized IV. The theoretical calcs may be important in formulating the trade, but if you can't realize those prices or therebouts, then those IV calcs aren't usable. Yes, generally, there are distortions in IV calcs as you move away fom ATM and/or move toward expiry. Illiquids may have unattainable IV calcs across the chain. You should be able to determine what is attainable and what isn't.
We can set aside the separate debate about real customer demand versus structural (MM) demand. I do not dispute that, in the absence of any bid, there is no IV. No one disagrees with that. That does not imply your assertion, however, that "IV is demand." In the absence of oxygen, there can be no fire. That does not mean that fire is oxygen.