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Implied Volatility represents the actual above-market premium an option contract trades for at any point in time, but it changes in mysterious ways.

If I wanted implied volatility to be higher, could I increase it by buying options directly at the asking price, and keep bidding it higher?

Similarly if I wanted to decrease implied volatility could I decrease it by selling options directly on the bidding price and keep bidding it lower?

Would this alter the stated implied volatility of that contract?

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  • You miss the volatility of the underlying is also to factor in.
    – DumbCoder
    Apr 14 '15 at 15:10
  • @DumbCoder you're right, this is also a factor. Yesterday I witnessed a stock rally and the IV went through the roof on the options, but then there was an IV crush on both the calls and puts when the rally retraced only a tiny amount - this I didn't predict in any scenario. Today the stock still trades at that level and the IV has returned. So I am now thinking many traders closed their long contracts (and maybe even many predicted the IV crush so sold many contracts), but seeing the IV revert back to a mean while the stock remains just as likely to surge in either direction, has me baffled
    – CQM
    Apr 14 '15 at 15:15
  • @DumbCoder typically I see IV decrease in rallies, or only one side of the book increase in IV if there is perceived overbuying. And then I see IV increase on both sides of the book during selling. This was the complete opposite of any of that
    – CQM
    Apr 14 '15 at 15:17
  • predicted or caused the IV crush by closing their positions. Think about it, no prediction needed. Apr 14 '15 at 16:53
  • @Knuckle-Dragger interesting, I can see the behavior of the market participants now
    – CQM
    Apr 14 '15 at 18:14
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Yes. You could also change it by narrowing or widening the movements of the underlying stock.

If there are any other market participants who have more capital than you who disagree that IV should be higher or lower, then you may find you run out of capital before making any meaningful change in IV.

However, be aware that doing transactions that are not bona-fide could be regarded as 'painting the tape' or 'spoofing', which in turn would subject you and your broker to severe regulatory penalties.

e.g. Nav Sarao found he could cause changes in the market by placing large numbers of orders the opposite side of where he wanted to buy. I don't know where the case is right now, but last I heard he was facing 350 years (!) in prison.

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Implied Volatility represents the actual above-market premium an option contract trades for at any point in time, but it changes in mysterious ways.

Implied volatility is not "the actual above-market premium an option contract". In non technical terms, implied volatility is a reflection of current price. If it is higher than historical values then it means that options are more expensive than they have been . If it is lower then it means that options are less expensive than they have been. The question then becomes, is this higher or lower IV an aberration or is it the new normal?

There's no mystery regarding change in IV. Change in option price is the cause.

If I wanted implied volatility to be higher, could I increase it by buying options directly at the asking price, and keep bidding it higher? Similarly if I wanted to decrease implied volatility could I decrease it by selling options directly on the bidding price and keep bidding it lower?

In isolation, if you have enough capital to move an option's price up, then yes, IV will go higher. In reality, others have more gunpowder. Market makers, floor traders and others will keep selling you the option that you are buying (or vice versa) while laying off the risk of their option via other strategies (arbs and delta neutral hedging).

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