SAQRID

SVQ · Pricing

Options fair value vs quotes

Also called: model mark, theoretical value, fair-value mark

An option's fair value is a model price from a fitted volatility surface; a quote is what someone will trade at. Only the quote is tradeable.

Definition

An option's fair value (also theoretical value or model mark) is the price a pricing model assigns given inputs such as spot, rates, dividends and an implied volatility taken from a fitted surface. A market quote is the bid and ask actually displayed by market participants.

The two serve different purposes: quotes tell you what you can trade at now; fair values give a consistent, smooth reference for analysis, risk and contracts that lack usable quotes.

Intuition

Many listed options, especially far from the money or far in time, trade rarely and show wide or one-sided quotes. Analyzing such data directly produces noisy Greeks, jagged surfaces and false arbitrage signals. Marking every contract to a fitted surface removes the noise and gives each option a price consistent with its neighbors.

The cost is that a model mark is an opinion. It is only as good as the surface fit and the assumptions behind it, and nobody is obliged to trade at it.

How it's calculated

A typical marking pipeline:

  • Collect quotes and compute implied volatility from mid prices where both sides exist.
  • Fit an arbitrage-consistent surface (for example SVI or SSVI) to those points, weighting by liquidity.
  • Price every contract from the fitted volatility: Vfair = BS(S, K, T, r, q, σfit(K, T)), or a lattice model for American exercise.

The gap Vquote,mid − Vfair measures how far the market sits from the surface. Inside the bid–ask range, the gap is usually noise; outside it, either the quote is stale or the fit is missing something.

Example: a thinly traded wing option quoted 0.80 bid and 1.60 ask has a mid of 1.20. If the fitted surface marks it at 1.05, the gap of 0.15 sits well inside the spread and says little; a mark of 1.90, outside the quotes, would deserve a closer look at both the data and the fit.

How to read it

Use fair values for consistent analytics such as Greeks, densities, scenario P&L and comparisons across strikes. Use quotes, with their spreads, when estimating what a trade would actually cost.

Always check the label. A tool that mixes quoted and marked prices without saying which is which invites false conclusions about mispricing.

Common mistakes

  • Treating a model mark as a price you can trade at.
  • Calling the difference between quote and fair value an arbitrage without accounting for the spread and the model's error.
  • Ignoring how the surface was fitted; a different fit can move marks materially in the wings.
  • Using marks from a stale surface after a large move in the underlying.

In Saqrid

In SVQ, option marks without a two-sided quote carry a fair-value label, so you can see they are model marks rather than tradeable prices.

SVNexus labels how options IV rows were admitted: quote-gated, fair-value-gated or a backfill proxy.

Open SVQ or SVNexus.

  • Implied volatility surfaceAn implied volatility surface maps the implied volatility of options across strike (or moneyness) and time to expiry for one underlying.
  • Butterfly arbitrageButterfly arbitrage exists when option prices are not convex in strike, so a butterfly spread would cost less than zero to own.
  • SVI parameterizationSVI is a five-parameter formula for one expiry's implied total variance that fits equity smiles well and has known no-arbitrage conditions.
  • Gamma exposure (GEX)Gamma exposure (GEX) estimates how much options dealers may need to buy or sell to stay hedged as the underlying price moves.

Go deeper

Saqrid Institute lesson: Risk-Neutral Pricing & No-Arbitrage. Lesson text is open to read without an account.

← All terms