higher implied volatility always = higher price ?
For options - Can out of the money puts have a lower price and a higher volatility relative to near the money puts?
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Yes sometimes that happens and it's because of the skew. I remember back in 2020 with COVID we had that happen. I'm not sure about the numbers but some OTM puts had 120% IV and lower prices.
In market downturns participants bid up the IV on deep OTM puts as tail risk hedging, this happens a lot with increased volatility and uncertainty. Equity returns are also negatively skewed so downside protection is pricier, in terms of IV.
Thanks for the reply - when you say bid up volatility, what does that mean? Wouldn't price go up as well?
Yes but you risk less. Also you can potentially make more money... All depends where the market goes
Thanks - Faze is saying price is lower, and now you are saying price is higher, so which one is it ?
Nuclear is correct, when you bid the IV and it increases, all else being equal then the price increases.
ATM Vega > OTM Vega. ATM options have the highest Vega and OTM have lower thus even when IV increases the latter still increases but less than the former, in absolute terms.
In general and I might be wrong, is that I believe the $ change in value of ATM is higher than OTM given the higher Vega. But, the OTM $ % change is likely higher. Thus in absolute$ terms the OTM put will still have an increase, but not as huge as the ATM one.
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