Otc option bid ask spreads

The bid-ask spread as a percentage of the option premium is calculated by dividing the difference between the ask and bid prices by their average Verified Answer #1. There is no single meaningful average for over-the-counter (OTC) options across different calls and puts Verified Answer #1. Dealers in OTC markets typically quote prices based on implied-volatility spreads rather than premium spreads Verified Answer #1. The resulting premium percentage is influenced by factors such as moneyness, tenor, underlying liquidity, and the bespoke nature of the trade Verified Answer #1.

Pricing Conventions

OTC foreign exchange (FX) options represent the deepest vanilla OTC options market and serve as a standard benchmark for dealer pricing conventions Verified Answer #1. Using the Black-Scholes model, a small change in premium resulting from a volatility spread is approximately equal to the product of the option's Vega and the change in volatility Verified Answer #1. The premium spread in percentage terms can be approximated by dividing the product of Vega and the volatility change by the mid-premium Verified Answer #1.

Market Observations

For liquid, near-at-the-money (ATM) vanilla OTC options, the spread is typically in the low single-digit percentage of the premium Verified Answer #1.

Examples at 20% Implied Volatility

• For a 1-year ATM option, a 0.25 vol-point spread results in a premium spread of approximately 1.25% Verified Answer #1.
• A 0.50 vol-point spread for a 1-year ATM option leads to a premium spread of approximately 2.49% Verified Answer #1.
• For a 3-month ATM option, a 0.25 vol-point spread equates to a premium spread of approximately 1.25% Verified Answer #1.
• A 0.50 vol-point spread for a 3-month ATM option results in a premium spread of approximately 2.50% Verified Answer #1.