How Can an Option Trader Profit from a Mispriced Implied Volatility?
A trader can profit by using strategies that exploit the difference between the option's implied volatility (IV) and their own forecast of the asset's future realized volatility (RV). If IV is too high, the trader can sell volatility (e.g. selling a straddle).
If IV is too low, the trader can buy volatility (e.g. buying a straddle), betting that the market's forecast is wrong.
Glossar
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.
Realized Volatility
Measurement ⎊ Realized volatility, within cryptocurrency and derivatives markets, represents the historical fluctuation of asset prices over a defined period, calculated using observed transaction data.
Crypto Volatility Index
Measurement ⎊ The Crypto Volatility Index represents a quantification of expected price fluctuations within the cryptocurrency derivatives market, typically derived from options pricing.