Looking at a bear call spread with 1 week to expiry, where both options are just OTM. Difference in the strikes is $2.50, and the midpoint of the B/A spread is $1.75 credit. Using the optionsXpress "pricer", I estimate the fair value of the spread is $1.51, so in either case the risk/reward is lower than I might expect for an OTM credit vertical. One obvious answer is that I'm not gonna get that fill. Still, I think there is more going on, but I'm not sure what it is. Is this just the market saying the underlying is expected to bounce to the upside; i.e., I have to be richly compensated to take the bearish position? For what it's worth, the bear put spread with the same strikes has a B/A mid of $1.35 and an estimated fair value of $1.59, both of which are more in line with what I would expect for such a position. No, I'm not looking to arb the trade .
Yes it's priced for a bounce. If the bounce happens volatility will be squeezed out. It's currently being squeezed out of the puts hence the "value" in the otm puts. You'll get the price if your talking about liquid stuff.
If you are calculating the "fair value" off of flat-vol, the problem is that you are not taking the skew into account. Fair value (skew) = Fair value (flat-vol) + vega (strike in middle of spread) * slope of skew
Unfortunately, I don't know the model being used by oX to calculate fair value. I might try to recreate your calc and compare. Thanks.