Define ‘Implied Volatility’ in the Context of Options Pricing.
Implied Volatility (IV) is the market's expectation of how much the price of the underlying asset will fluctuate over a specific period, derived by working backward from the current market price of an option. It is a key input into options pricing models like Black-Scholes.
Unlike historical volatility, IV is forward-looking and represents the uncertainty or risk perceived by the market, directly influencing the option's premium.
Glossar
Risk Perceived
Volatility ⎊ Risk perceived within cryptocurrency, options trading, and financial derivatives is fundamentally shaped by inherent volatility, exceeding traditional asset classes.
Options Pricing Models
Models ⎊ Options Pricing Models are mathematical frameworks, such as Black-Scholes or binomial trees, adapted to calculate the theoretical fair value of derivative contracts based on underlying asset dynamics and market parameters.
Underlying Asset
Futures Pricing incorporates the cost of carry, which in crypto markets includes funding rates derived from perpetual swap markets and the time value associated with holding the spot asset.
Uncertainty
Volatility ⎊ Market uncertainty is primarily expressed through volatility, which option prices reflect via implied volatility levels across the strike and term structure.
Implied Volatility
Expectation ⎊ This value represents the market's consensus forecast of future asset price fluctuation, derived by reversing option pricing models using current market premiums.