Define “Implied Volatility” (IV) and Its Importance for Options Pricing.
Implied volatility (IV) is the market's expectation of the future volatility of the underlying asset, derived by inputting the current option price into a pricing model like Black-Scholes. It is crucial because it is the only unobservable input and reflects market sentiment and risk perception.
Higher IV leads to a higher option premium.
Glossar
Future Volatility
Horizon ⎊ The anticipated fluctuation in cryptocurrency asset pricing, particularly within derivative instruments, represents a critical element of risk management and strategic trading.
Unobservable Input
Estimation ⎊ An unobservable input is a critical parameter in financial modeling that cannot be directly sourced from observable market data, necessitating a robust estimation process.