Please see the image of the Implied volatility of different strike prices separated by 100 points. This is the recorded data of the actual market.

Implied Volatility at different strikes

As it can be clearly observed that the Implied volatility of all strikes moves almost with 1 correlation. But the market activity during different strikes was very different. The market volumes were high at the strikes 15600CE and 15700CE. And the Volumes at 15400CE were very low. It seems that the Implied Volatility is manipulated. Please explain why this high correlation is seen in the market.

1 Answer 1


It does not suggest manipulation. To quote another answer:

The efficient market hypothesis implies that the key driver of stock price changes is not trading volume but predictive information.

The same goes for options. Many options rarely trade, but their bid and ask quotes are nevertheless continually updated by a market maker based on a pricing model. The implied volatility (IV) you plotted may be based on the bid and ask, not just on actual trades.* Or, if the time intervals on the chart are long enough that trading is occurring at all strikes but simply much more at some than others, then it is still true that low volume doesn't prevent prices from shifting quickly.

When expectations shift toward large moves (for stocks in general or this stock/index in particular), IV tends to increase at all strikes simultaneously. Option pricing models incorporate typical relationships of IV among strikes, such as the volatility smile.

*In this case, even though the IV may not reflect actual option trades, it is a real indicator: Offers for potential trades were present with that IV, and the fact that trades didn't happen shows that market participants agreed the IV was fair (to within the market maker's spread). For example, if the quoted IV were way too high compared to a consensus value, then traders would have been selling the option and bringing down the market maker's price.

  • Absolutely. I would actually be quite surprised if they don't move in sync.
    – Aganju
    Jul 3 at 22:16

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