How Does High Volatility in a Cryptocurrency Affect the Option Premium?
High volatility increases the option premium for both call and put options. Volatility represents the potential for large price swings, increasing the probability that the option will end up "in the money" before expiration.
This higher probability of profit makes the option more valuable to the buyer, and thus the seller demands a higher premium to take on the increased risk.
Glossar
Probability of Profit
Framework ⎊ Within cryptocurrency derivatives and options trading, Probability of Profit represents a quantitative assessment of the likelihood that a trading strategy or position will generate a positive return, considering inherent risks and market dynamics.
High Volatility
Dispersion ⎊ High volatility within cryptocurrency, options, and derivatives signifies an expanded range of potential price movements over a given period, reflecting heightened market uncertainty and risk.
Option Premium
Cost ⎊ The Option Premium represents the initial cost paid by the buyer to acquire the right conveyed by the contract, functioning as the price for risk transfer.
Volatility Skew
Bias ⎊ This term describes the non-symmetrical relationship between implied volatility levels for options with different strike prices, indicating a market bias toward expecting larger moves in one direction.
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.
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.